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MBE Manchester: Lenders ask FSA to ban 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 today, FSA manager of mortgage policy Blackwell, told delegates: “Some people want use to ban interest-only, and that includes lenders – some lenders have asked us to ban interest-only. We have listened to all the different views and what we accept is that interest-only is right for certain borrowers.”

A number of lenders have significantly tightened their interest-only criteria since the start of the year, with many capping their maximum loan-to-value for this type of lending at 50%. The Co-operative Bank has gone further by pulling out of this lending altogether.

Blackwell added the regulator is looking at suggestions for transitional arrangements, designed to help those 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 onto 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 and allow 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 continue to speak to trade bodies before finalising our rules.”

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  • Chris Gardner 26th May 2012 at 3:51 pm

    Those lenders calling for a ban need to careful what they wish for – calling for a ban will be an admission that these loans are bad and that they are part of a mis-selling scandal

  • Liz 24th May 2012 at 10:46 am

    I agree with so many comments above! Lenders have the power to lend or not lend so why try to make the FSA ban IO, just don’t lend if you don’t want to.

    And although sadly in many, many areas the FSA seem to lack a practical understanding of clients’ needs, how things actually work in realtity, and what financial products actually do, in this case they have ‘done good’ – yes people have different circumstances, and thus yes although not suitable for many interest only is suitable for some.

    And you crazy lenders – ban IO all together? Seriously? Someone with a nice PCLS due to repay their small mortgage, why not? Someone with a portfolio of BTL’s some of which will be sold in 15-20 years time to repay the mortgages on the ones they plan to keep, why not? Someone who can get an interest only mortgage for significantly less than they would pay in rent who is for example traininbg to be an accountant and would see their basic income trebble over the next 5 years, why not?

  • Shaks 24th May 2012 at 12:20 am

    Interest only even without a structured repayment vehicle thingy is far better than renting. So what if I don’t repay any of the capital!!!
    Most mortgages are taken over 25 years. In that period it woulld be virtually impossible not to make some capital gain in value. A tenant over 25 years will have paid out significantly more and almost certainly will not share even one penny in the increased value of the property that he or she has lived in and cared for.There will always be plenty of people who wish to buy a property on IO rather than renting and as long as they fully understand the long term implications and accept this I woukd support those who want to make this choice. Many people simply cannot afford a repayment mortgage but would love the chance to share in long term capital gain. Why deny people this chance if sold with a good level of deposit. Iknow the train spotters and the which guide readers out there will be up in arms but most of them have no idea how the average man struggles financially, paying excessive rents to landlords who own properties with IO mortgages, looking forward to enjoying the long term capital gain in their investment properties.

  • Stuart Duncan 23rd May 2012 at 5:16 pm

    I do agree that the FSA have listened to the industry on the MMR up to a point, but they have stood aside whilst borrowers have been treated very unfairly in many cases when it comes to interest-only.

    I also get concerned about the use of the word “Vehicle” as if it is better to have an equity-based investment rather than a strategy to overpay or use other assets, which is often more appropriate for some consumers.

  • Peter Gladdy 23rd May 2012 at 5:00 pm

    Like so many other things the answer is not to ban the product but to control the way the product is sold. On this particular product, unless they later cave in, the FSA have got it right.

    It eas lenders, not intermediaries, that developed such a product and it is so simp;e for any lender that does not agree with such a product to withdraw it, rather than asking the FSA to do their job for them and therefore deprive borrowers where this product is suitable to them from accessing it.

  • Mary Lockyer 23rd May 2012 at 4:13 pm

    Lenders should not ban interest only where there is a clear demonstrable and viable payment vehicle, they ought to check this annually and load the interest rate to cover the cost of doing this. I cannot see how imposing a blanket ban fits TCF culture, and will create a massive problem for millions of borrowers. I have written one true interst only mortgage in the last 15 years, and I actively monitored the client’s capacity to overpay from bonuses,the mortgage was redeemed in under 5 years. We need responsible lending and accountability not knee jerk reactions,

  • cena 23rd May 2012 at 4:03 pm

    Dont worry its not a fire that you can see in the distance – its just the smoke coming out of Bobbys ears.

  • Lisa 23rd May 2012 at 2:32 pm

    PMSL!

  • Peter 23rd May 2012 at 2:18 pm

    What a pathetic load of individuals these bankers are. It is about time they grew up and took responsibility for making decisions as to what is and is not acceptable based on the individuals circumstances, rather than ask the FSA to decide for them.

  • S Tainer 23rd May 2012 at 2:16 pm

    Why would Lenders ask the FSA for this? Surely they need only change their criteria such as the Co-op Bank has! Is this just the FSA trying to strengthen their own reasons for doing what they want and to hell with everything else?

  • terry 23rd May 2012 at 2:16 pm

    Whilst I am not an advocate of interest only mortgages, I am at a loss as to why lenders want the FSA to ban them. Surely the lenders have the bottle to withdraw from interest only lending if it does not fit their business model. It strikes me all they want to do is say “its not me governor” when they get a request from someone who wants an interest only mortgage and be able to say they are banned by the FSA. Are they frightened that some lenders will continue in some way or another in the interest only market and they will lose market share or are they frightened of validating them to the FSA

  • Pat Bunton 23rd May 2012 at 2:15 pm

    Lynda and her colleagues have shown an ability to listen throughout the MMR process and it is heartening to see that there is a recignition of the fact that the Transitional Provisions need further thought. It is vital that consumers interests, as well as those of lenders are taken into account as in a world full of mortgage prisoners the consumer is the one running the gauntlet here – if these existing borrowers are left in the cold it would be a very poor regulatory outcome

  • Jon T 23rd May 2012 at 2:12 pm

    Hurrah for the FSA (I don’t say that often!). IO is indeed appropriate for SOME borrowers, imposing a blanket ban would be far too restrictive.

    What I don’t understand is why the lenders who called for IO to be banned simply stop lending on this basis. Some of them do this already, so a ban is not actually required!