Mortgages  

How have interest-only mortgages evolved?

This article is part of
Guide to interest-only mortgages

How have interest-only mortgages evolved?

The FCA's review of the mortgage market began in 2005, when it launched the first of two studies into the effectiveness of the mortgage conduct regime, introduced in 2004.

These customer-facing reviews were complemented by a series of firm-facing thematic projects, which also began in 2005.

They looked at responsible lending practices in the areas of sub-prime, interest-only, self-certified mortgages and lending into retirement.

At that early stage the regulator was already finding weaknesses in responsible lending practices and in firms' assessments of a consumer's ability to afford a mortgage, and had already started working with the industry to try and raise standards.

FCA remit

As the credit crunch hit, this brought a much wider remit to the FCA's work, extending it beyond a narrow conduct focus to the wider prudential and macroeconomic context.

In the 2010 Mortgage Market Review (MMR) responsible lending report, the regulator stated: "The mortgage market worked well for many consumers.

"But it was also clear that the existing regulatory framework had been ineffective in constraining particularly risky lending and unaffordable borrowing.

"Circumstances led lenders to feel insulated from losses arising from poor lending, largely as a result of being able to pass risks onto others (for example, by securitisation) and also by the widely held expectations of continuing growth in property values.

“This resulted in relaxed lending criteria and increased risk taking, and increased competition pushed lending further along the risk curve with a rash of new market entrants, often non-deposit taking lenders, adding to this."

The regulator stated the evidence suggested that interest-only mortgages had often been opted for by borrowers to extend affordability, with no firm plans put in place to repay the capital.

Until around 2007 to 2008, most lenders offered interest-only or repayment on the same terms and up to the same loan-to-value (LTV). At the time you could get interest-only at 100 per cent LTV or more.

This was the era of the UK's housing market's boom and bust.

Although a wider range of people could get mortgages it became very clear to the government and the regulator that there was a problem.

People with little or no deposit and poor credit records were taking out mortgages.

This was a big risk, both to lenders who were less likely to get their money back if the borrower was unable to pay and the borrower who, seeing any change in income or repayment could struggle to make their monthly payment.

From around 2009 the government started to look at ways to ensure greater account was taken of the overall affordability of the mortgage.

Data from the FCA in 2010 showed at the height of the market almost 33 per cent of all residential mortgages advanced in the UK were sold on an interest-only basis, with around three quarters of these having no specified repayment vehicle.