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Home > Mortgages > Mortgage Data

By Donia O'Loughlin | Published May 24, 2012

FSA: MMR will not ban interest-only mortgages

The Financial Services Authority has said it has no intention of banning interest-only mortgage products as part of the Mortgage Market Review, despite calls from major lenders that it should do so, according to Lynda Blackwell, an officer in the regulator’s conduct policy division.

Ms Blackwell said the regulator would not be using the new regulations, for which there is yet no firm date for implementation, to ban the products and neither does it intend to “be prescriptive about the type of repayment vehicle” lenders could or couldn’t accept.

In proposals published in December 2011, the FSA said it would introduce limitations on the issuance of interest-only loans, saying that that such loans could only be advanced where a consumer has a “clearly understood and credible strategy” to repay the capital at the end of the term.

However, despite assuring that the regulator would not extend this to a full prohibition, Ms Blackwell revealed that a number of lenders actively wanted interest-only banned.

She said: “Some lenders would have liked us to ban interest-only. Our view is that interest-only is suitable for certain borrowers. We’ve said to lenders that we want you to make an informed judgement.”

Ms Blackwell also said that some lender reactions to the FSA’s thinking in this area had changed recently when they revealed the responsibility would be placed in their hands.

She said: “The lenders who said they didn’t want prescription, suddenly when it was over to them [they] said they now wanted prescription.”

In terms of when a lender would be required to review a borrower’s repayment vehicle to ascertain whether it was on track to pay off the capital, Ms Blackwell said the FSA had gone against some of the advice it had received from consumer groups.

She said that lenders would “at least once during the term of the interest-only mortgage” need to go out and check that the repayment vehicle was “on track”.

On the issue of whether property sale as a means of repaying the interest-only mortgage were to be banned, she said no but she did say that lenders would need to consider it as a method of repayment “very carefully”.

James Chidgey, senior manager of corporate distribution at Nationwide, voiced concern about how lenders actions in relation to interest-only would be viewed much further down the line.

He said: “Ten or 20 years down the line where would the ombudsman and the claims management firms be on this?

“Prudently we might want to review [the repayment vehicle] more than once. [However] where a customer sees us reviewing their repayment vehicle they may believe we are responsible for it.”

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