MortgagesApr 17 2013

FCA issues guidance on interest-only

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The 16-page Mortgage Market Review Lender Roashow Q&A document covers points raised by intermediaries during a recent round of adviser roadshows on the MMR.

The FCA said it was important for lenders to have robust strategies in place to offset possible liabilities should homeowners not be able to meet the repayments on interest-only mortgages.

While stating that downsizing was not prevented under the FCA’s MMR rules, it added that lenders needed to give evidence that at the time of underwriting it was credible that the customer would be in a position to downsize at the end of the term of an interest-only mortgage, without taking into account any potential rises in house prices.

The regulator said that moving into rented accommodation after the sale of a property was unlikely to be a credible repayment strategy. However it did not prescribe what action lenders should take to elicit information regarding repayment strategies.

Th report comes ahead of the FCA’s long-awaited thematic review on interest-only mortgages, which the regulator said was expected to be published in mid-May.

Adviser view

Derek Gair, partner of Hampshire-based GDC Associates, said: “I particularly like the bit about whether moving into rented accommodation is not credible for an interest-only customer with no other repayment option – hilarious.

“Surely someone in this position will have benefited from an increase in house prices and would therefore be less of a burden on the state if they sold up and moved into rented accommodation. I don’t think the regulator should be interfering in commercial decisions. Surely that should be down to the lender? These points leave more questions than answers.”

Interest-only repayment plans

The FCA document follows an announcement by UK Asset Resolution that it was contacting customers about interest-only mortgage repayment plans.

Tim Newman, head of customer and external communications for the body tasked with running the nationalised mortgage books of Bradford & Bingley and Northern Rock, said it currently had 163,000 interest-only customers in total, with just under 26,000 set to mature in the next 10 years.

He said: “The problem we have is that we don’t know the financial positions of our customers, and how they plan to repay their mortgages.

“As we are a closed-book lender there is less opportunity for dialogue with our customers, so contacting them about their plans is central to our strategy.”

He added that UKAR was also looking to engage with brokers, as intermediaries had sold the “vast majority” of interest-only mortgages through the nationalised lenders, and “they had a big role to play” in educating clients about the need to plan for repayment.

Other lenders including the Yorkshire Building Society, HSBC and Lloyds Banking Group all claim to be pro-actively contacting their clients regarding on their repayment plans.