Regulator rejects calls to kill off interest-only

The Financial Services Authority has revealed that a number of lenders have asked it to ban interest-only lending as part of its Mortgage Market Review.

In its final MMR consultation paper, published in December, the regulator proposed lenders calculate interest-only loans on a capital and repayment basis, unless the borrower has a feasible way of repaying the capital at the end of the term.

But the FSA has revealed some lenders have called for these loans to be banned in their feedback submissions on the final proposals.

Speaking in a seminar at the Mortgage Business Expo in Manchester last week, Lynda Blackwell, mortgage policy manager at the FSA, told delegates: “Some people want us to ban interest-only, and that includes lenders.

“We have listened to the different views and what we accept is that interest-only is right for certain borrowers.”

A number of lenders have tightened their interest-only criteria since the start of the year, with many capping their maximum LTV for this type of lending at 50%. The Co-operative Bank has pulled out of the sector altogether.

Blackwell says the FSA is looking into claims that transitional arrangements, designed to help borrowers who might become ’mortgage prisoners’ as a result of the MMR, might not be strong enough.

The arrangements allow lenders to bypass the new affordability proposals to help borrowers on to a new deal, as long as no new monies are advanced.

But the Association of Mortgage Intermediaries has previously suggested the arrangements should be bolstered to enable borrowers to borrow up to 10% more and allow for a 10% increase to their monthly repayments.

Blackwell told delegates: “There is a concern that we have been too restrictive in not allowing borrowers to borrow a bit more. We recognise there are times when that is the right thing to do.

“We will continue to analyse this and speak to trade bodies before finalising our rules.”