Am I likely to be pulled up for failing to look after my customer at a later date?
Paul Shearman is mortgage, protection and general insurance proposition director, Openwork
A: Thanks for what is a very pertinent question.
Repayment mortgages are usually the most suitable for residential mortgages so where your recommendation is for an interest only mortgage, there should be a clear reason as to why you are recommending this method rather than repayment.
Whilst interest only mortgages offer cheaper monthly payments the full cost over the term is considerably higher and the amount outstanding will not reduce unless the client has some other way of repaying the loan.
As a mortgage adviser, whilst authorised to advise on interest only mortgages, unless you are also an authorised pensions and investment adviser you may not be able to advise on the suitability (or otherwise) of a repayment vehicle.
However, you do have a duty of care to ensure that the client’s chosen method of repaying an interest only mortgage passes a ‘reasonableness’ test. This could, for example, involve asking the client to confirm that they are monitoring the performance of any savings, investments or pension plans that are earmarked for repayment purposes, and you should always encourage the client to have any such repayment vehicle regularly reviewed by an authorised person.
This could also be a good opportunity to build a referral relationship with an investment adviser to support your client if you aren’t licensed.
As you will be aware, several lenders have already/are tightening up their rules on what is acceptable, with many no longer accepting business where there is no acceptable means of repayment.
You should therefore stay up to date with the latest changes and ensure you always clearly document what repayment method is being used. None of these options can guarantee that an interest-only mortgage will be repaid at the end of the term. The chance of negative equity is also much higher with this type of loan, as the debt is not reducing.
On conclusion, my reading of the FSA’s thinking is that where no realistic means of a repayment exists it would not be appropriate to recommend an interest-only mortgage.
Continuing to place interest-only cases without a clear repayment strategy being in place and documented, I believe would put your business at risk of FSA sanction.
