MMR impact on take-up of interest-only mortgages

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the Mortgage Market Review, Dale Jannels, managing director of Atom (All Types of Mortgages Ltd), says many lenders had withdrawn from interest-only offerings entirely amid FCA probes into the sector.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.

Mr Nicholls says dwindling interest in interest-only can be attributed to the public seeking some certainty of repayment particularly as interest rates remain very low; capital and interest is often more palatable on borrowers affordability.

John Charcol’s Mr Boulger says the fact that many lenders have withdrawn from offering interest-only mortgages causes particular problems for those with an existing interest-only mortgage who want to effect a product transfer or move home and port the mortgage.

Mr Boulger says those who already have interest-only mortgages may run into problems these days, including when they don’t want to increase the size of their mortgage or even want to reduce it.

He says the transitional arrangements included in the MMR allow lenders to offer a new mortgage in these circumstances, providing the borrower is not increasing the amount of the mortgage except by the addition of the lender’s arrangement fee, even if the borrower does not meet the new affordability requirements.

However, Mr Boulger says most lenders, especially the larger ones, are ignoring the transitional arrangements in relation to porting, and some even on product transfers.

By ignoring the policy intention, as set out in the transitional rules, and relying instead on their contract terms, Mr Boulger says the question arises as to whether lenders are breeching the FCA’s principle six of Treating Customers Fairly.

Mr Boulger says: “Of course such judgements are subjective unless the FCA provides suitable guidance.”

But Keith Barber, associate director of business development at Family Building Society, says it is unclear what direct impact the MMR has had on the sale of interest-only mortgages. Mr Barber says a number of lenders withdrew or placed conditions on availability.

He says: “The likelihood is that most advisers will look to recommend a repayment mortgage if at all possible, so it is likely that fewer interest-only mortgages will be taken out.”