OpinionMay 8 2013

Interest-only horse has long since bolted

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I am sure I was not the only person to mumble under their breath “about time” last week when the Financial Conduct Authority finally confirmed that it would review interest-only mortgages.

Interest-only mortgages have been a scandal waiting to happen and should have been banned years ago. I have commented in the past about what a huge risk they were for borrowers and I am surprised the regulator has taken until now to cotton on to the problem. Perhaps if it had read my comments in Financial Adviser more closely it could have “nipped things in the bud” earlier – the words of FCA chief executive Martin Wheatley.

Sadly, the horse well and truly bolted out of the gate a good 10 years ago and is now well into the next field but one.

There is some comfort in the fact that at least the regulator is taking the problem seriously and it has published in full the findings of its interest-only review, undertaken by independent company GfK. It is also helpful that the regulator has “reached agreement”, as it said, with lenders on asking them to contact interest-only borrowers for a so-called ‘wake-up call’. There will certainly be quite a few alarms going off if all 2.6m interest-only borrowers are contacted.

So what is wrong with interest-only mortgages? My first question would be: what is right with them?

They expose hard-pushed borrowers to ludicrous levels of risk. Imagine paying interest on a home loan for 25 years and then having no right to live in the house you took a loan out to buy. You might as well have just rented.

Interest-only mortgages should never have been sold by lenders in the first place and I am staggered they were so widely offered to people who had only a vague idea how they would repay the capital. They were in effect perpetual loans with no effort made to reduce the capital and almost certainly led borrowers to borrow too much, driving up house prices and encouraging reckless borrowing.