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FCA concern about lender withdrawals from interest-only

The Financial Conduct Authority is concerned about the availability of interest-only mortgages after a lender exodus from the sector over the last year.

Martin Wheatley 480

In its first annual risk outlook, the FCA says a combination of uncertainty and increased changes means firms may not be making the right strategic choices and may be misinterpreting regulatory guidance.

It states: “[It] may make it difficult for firms to step back and strategically assess the adjustments they need to make to their business models and strategies to ensure future viability and sustainability.

“This could lead to precipitous withdrawal of firms from business areas and products without fully assessing how they could continue to operate within the boundaries of new regulation.

“For example, major firms restricting interest-only mortgages because of concerns about retrospective regulatory judgements on lending decisions.”

Last week, HSBC and Accord Mortgages became the latest to pull out of interest-only deals while the vast majority of other lenders have either withdrawn or restricted their offerings.

It states: “While withdrawal from a product or market creates an opportunity for niche firms, the gap between withdrawal and the establishment of the niche market can leave consumer choices limited.

“Our responsibility to ensure the proportionality of regulation and avoid regulatory failures will be particularly challenging where protracted economic and financial market stress may lead to changes in the timing of planned regulatory reforms.”

The mortgage market review rules, which come into forced next April, scale back the use of interest-only by demanding more stringent repayment plans while FCA chief executive-designate Martin Wheatley has described interest-only mortgages as a “ticking timebomb”.

The risk outlook also accuses bridging finance of “exploiting regulatory loopholes” and says the use of financial advice may decline after the RDR meaning consumers will need higher financial capability.

In its business plan, also published today, the FCA says it will publish the results of an initial review into interest-only mortgages in the near future. The FSA has been investigating interest-only mortgages and the risk of existing customers being unable to repay the amount due at the end of their mortgage term.

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  • City Boy 27th March 2013 at 4:33 pm

    C. Robinson – Congrats on your IO mortgage, if only all customers were like this.

    However, you obviously have no idea of the banking sector,so we’ll just leave it at that.

    What has the BBR got to do the rates banks lend at?? The answer is absolutely nothing. You’ve been watching the BBC for long.

    Keep on bank bashing this old nugget isn’t getting old at all.

  • C. Robinson 27th March 2013 at 1:40 pm

    Why doesn’t the government/regulator do something about this, always poke it nose where it’s not wanted and where it should it doesn’t i.e. rising petrol, rising gas, and electricity swindling MP’s. I have a interest only mortgage which I took out 13 years ago (because I could not afford a repayment, and did not want a endowment because of swindling banks and insurance companies, again the government did nothing) now I owe half what was initially borrowed by over paying and offsetting.
    The interest on my loan varies (£38 – £44) per month I pay £350, if I continue with this arrangement I’ll be loan free in 7 years, not everyone with interest only mortgage are stupid, as I said before why doesn’t the government stop banks etc ripping the public off, bank of England base rate 0.5 % bank rates up to 4 -7 % for first time mortgage buyers WHY

  • Grey Haired Underwriter 26th March 2013 at 10:15 am

    I find it strange that nobody understands that Repayment is better for a lender than IO. The opportunity to get out of IO and use the Regulator as an excuse was too good to miss for a lot of lenders. Not only does capital repayment reduce the risk on an annualised basis but there is a better profit in Capital repayment. I think that there needs to be caution before blaming the Regulator for the way that the IO is disappearing.

    I also wonder sometimes whether this furore is another one of those situations where the history of our market is forgotten. In days of yore (about 25 years ago)lenders used to charge a premium for interest only but this went out of favour when the lender realised they could make some nice commissions from the sale of endowments. Those commissions disappeared as the broker market became more active but the lenders didn’t have the cojones to reinstate the premium on the interest rate. Now that they have the excuse isn’t it amazing how quickly it is being taken advanatage off. So be cautious in your comments about the regulator and ask yourselves whether an improving loan book and and a better profit margin might have something to do with the situation.

  • Hugh Wade-Jones 25th March 2013 at 5:09 pm

    Makes life harder in some instances but where Joe Bloggs can’t get an IO himself he’ll probably now use a broker. When others get greedy I get nervous…….when others get nervous I get greedy!! Come on all surely w/ HSBC et al withdrawing it presents some good opportunities

  • The Cynical Broker 25th March 2013 at 5:06 pm

    For a long time now, lenders have been assessing loans on a repayment basis, irrespective of whether it was Interest Only or not. So interest only became a lifestyle choice not an affordability issue! If the borrower has a plausible repayment strategy and is an adult, then they should be allowed interest only. This is where the regulator has got it hopelessly wrong, and if it’s true that lenders are “misinterpreting regulatory guidance”, then the FCA needs to clarify its position with some speed and using clear plain languauge that even a lender can understand.

    Like that’s going to happen.

  • Mary Lockyer 25th March 2013 at 4:16 pm

    Not only are they closing the door, but they are also actively calling up borrowers and trying to co cerce them on to repayment mortgages, I suggest you look at the transfer products and the SVR for old “self cert mortgages, no TCF there either, not only loaded SVR but no five year rates, only two year deals, if they took the lending on in the first place, and the borrower is not in arrears, at least make it possible and affordable to switch to repayment, talk about cutting off the nose to spite the face,

  • Stuart Duncan 25th March 2013 at 3:49 pm

    @ Anonymous | 25 Mar 2013 1:52 pm
    What has interest-only got to do with LTV? Surely it should be based on borrower’s situations or aspirations.

  • John Constable 25th March 2013 at 1:52 pm

    It is true that this situation will continue for some considerable time.

    However, in the dim and distant future, it is just possible to visualise a situation where the clients current financial position is fully known to an Automated Valuation Model (AVM), which is fully approved by the regulator.

    Therefore, if the AVM spits out ‘computer says yes for int-only’ then the deal can happen, otherwise no.

    As the AVM model will be regulator-approved, then there should not be any problems with ‘misselling’ to follow.

    However, this type of scenario is some way off as I believe ‘fully automated’ conveyancing has only just got going in England.

    Everything takes forever in England, except the Olympics of course, where there was an immovable deadline.

  • Stuart Duncan 25th March 2013 at 1:30 pm

    I agree with the above comments, but at least the FCA are making public pronouncements that flag up the issue rather than the FSA approach of saying different things to different people.

    Unfortunately, it will take stronger words to make a difference, such as making it clear that the FCA believe in TCF and will hit lenders hard for ignoring it. Or that they will insist on lenders making interest-only available to those with appropriate repayment strategies (and not just formal repayment VEHICLES).

    If regulators insist on intervening in the market, then at least it should be done intellegently in the interests of consumers and not just for some “Four-legs-good-two-legs-bad” reason.

  • James 25th March 2013 at 12:38 pm

    Someone has woken up to the fact there are clients out there who have a sound repayment plan for interest only mortgages but are now unable to remortgage because of the additional costs involved of a repayment mortgage or, who are cashing in their investments early and paying off some of the borrowing to reduce the overall cost. Both ways have disadvantaged the client and all because someone in the FSA said; it wasn’t good so the lenders being terrified to upset the FSA jumped to their silly tune. If you wrote a book on current day regulation to be studied by students 100 years from now they would think it was a work of fiction. The sad fact is it’s not going to get any better.

  • ADD 25th March 2013 at 12:23 pm

    They might also be surprised by the lack of insurance protection available to protect against sickness & unemployment.
    Sometimes I think Sid James & Charles Hawtrey will emerge from the offices in Canary Wharf. Carry on Regulating, you are doing a great job.

  • John Constable 25th March 2013 at 12:06 pm

    You reap what you sow and in this case, the regulator seems to have frightened off these institutions from offering interest-only.

    Now, the regulator says ‘come back in boys, we won’t bite you .. honestly’.

    Yeah, right.

    Once bitten, twice shy.

  • Mortgage Man 25th March 2013 at 12:01 pm

    There’s a surprise. The FSA say they have concerns over interest only and lenders decide not to do them anymore – why take the risk?

    The MMR has some sound logic. However any lender will have to decide if the cost of compliance and the risks involved is worth it.

    It is not surprsing many lenders do not want to spend time and money on documenting exactly what strategies they will and will not accept for interest only lending and what evidence they will and will not accept coupled with having to audit it. It isn’t worth it if you can do enough business without the hassle and cost, never mind the chance you may get it wrong and get hit with a whopping fine and further reputational damage.

    Withdrawal from interest only lending is a logical outcome of interference in a market which makes the cost and risk too high even if the principle is sound.

  • The Cynical Broker 25th March 2013 at 11:57 am

    Brilliant! You couldn’t make it up! Having caused the whole “Interest Only is bad for you” issue, and forced lenders to restrict and withdraw access to it, the FCS now comes out and says it’s concerned that lenders may not be making the right strategic choices and may be misinterpreting regulatory guidance. Who says irony’s dead !