The Mortgage Market Review has had a massive impact on the sale of residential interest-only mortgages, says Ray Boulger, senior technical manager of John Charcol.
The proportion of new interest-only mortgages in the residential mortgage market has fallen by over 75 per cent, from a 25 to 30 per cent share of sales to only 6 per cent, he claims.
Mr Boulger says: “The MMR puts a straightjacket on lenders in some respects but in theory also leaves them considerable flexibility on how they interpret the new rules.
“However, they feel seriously constrained in terms of how they interpret the rules, even where the FCA has in theory left it to their discretion, by the knowledge that they will have to justify to the FCA that their policies are reasonable and all are erring on the side of caution.
“What an applicant, and even a lender, considers reasonable may not coincide with the regulator’s view, with regulation being designed to protect the small minority of irresponsible borrowers rather than provide flexibility for the vast majority who will not risk losing their home and their deposit by taking out a mortgage which they can’t afford.
“In the days when the FSA was still the regulator it was not unusual for lenders to find that their FSA supervisor on the ground was applying stricter criteria than FSA policy dictated.
“Some lenders may have concerns, especially as many now have to deal with two regulators, the PRA and the FCA, whose demands will sometimes be at cross purposes, that this situation will re-occur.
“No doubt the twin regulators have learnt this trait from the government, which one day is criticising banks for not lending enough and the next complaining about irresponsible lending.”
But even before the Mortgage Market Review, Dale Jannels, managing director of Atom (All Types of Mortgages Ltd), says many lenders had withdrawn from interest-only offerings entirely amid FCA probes into the sector.
This accords with data supplied by the Financial Conduct Authority, which showed that contrary to claims that interest-only has dropped off very recently, issuance has been declining since 2008 and now stands at around 20,000 transactions a quarter, down from around 130,000 six years ago.
Those who continue to offer interest-only have a lot more stipulations before offering an interest-only mortgage, he points out. Mr Jannels says there must be minimum values of equity in the property, and maximum loans might be restricted to 50 per cent to 60 per cent of the property value.
He says all lenders will require a suitable repayment plan and must pass strict affordability calculations that take in to account future rate rises. The lender has to ensure that the customer will be able to repay their loan at the end of the mortgage term.
Andy Nicholls, mortgage and insurance specialist at IFA Beaufort Asset Management, agrees that new interest-only loans have been on the wane for some while.