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Home > Mortgages > Mortgage Data

Is interest-only exodus driven by FSA or waning demand?

There has recently been an exodus of lenders from the interest-only market but is this due to a drop in demand for the product or to the FSA’s review?

By Donia O'Loughlin | Published Dec 06, 2012 | comments

In the last two weeks, the Royal Bank of Scotland, Natwest and Coventry Building Society have pulled out of the interest-only market, arguing that interest in residential interest-only mortgages has plummeted.

Concern has grown in the last few weeks over the potential risks of mis-sold interest-only mortgages, culminating in the Financial Services Authority launching a review of existing interest-only borrowers to guage the extent of any problem.

Indeed, RBS and Natwest said that residential interest-only mortgages only apply to four per cent of their mortgage lending and Coventry stated that it has seen its mortgage applications for this sector drop to less than 2 per cent.

Moray McDonald, head of home lending at RBS and NatWest, said: “As a fast growing UK mortgage lender we want to focus on the products most of our customers are asking for. We don’t rule out offering residential interest-only mortgages to niche customer groups in the future but we would do that using specialist advisers rather than our broad base of branch and telephony advisers.”

Colin Franklin, sales and marketing director at Coventry, said: “Residential interest-only mortgages have declined to less than 2 per cent of all residential mortgage applications. We have therefore decided the time is right to leave this market.”

However, all three continue to offer buy-to-let mortgages on an interest-only basis.

This followed Nationwide’s move in October to stop offering interest-only mortgages to new borrowers. Nationwide said that its interest-only deals only accounted for 3 per cent of new lending.

FSA review

On 25 October, the regulator announced within its Mortgage Market Review that it will be launching an extensive review of existing interest-only borrowers to see how many are unable to repay the capital and to understand what steps lenders are taking to address this issue, as it ponders whether a ban for the product is required.

The FSA said it expects to publish the findings of this work in the first quarter of 2013. In an interview with FTAdviser, the watchdog highlighted that the review will seek to ‘quantify and assess’ the problem rather than address a problem that has already been identified.

The regulator emphasised that people will still be able to get interest-only mortgages going forward where there is a repayment vehicle in place, but said there is a different issue around existing interest-only mortgages.

Richard Sexton, director of e.surv chartered surveyors, said: “The problem with the FSA’s interest-only proposals is they just close the door after the horse has bolted. They don’t solve the real problem, which is the outstanding balances of existing interest-only mortgages, not assessment criteria for new ones.

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