The FSA has mooted various restrictions to interest-only deals in the MMR consultation paper, including the requirement that lenders monitor repayment vehicles for the mortgage term.
Proposals suggest that lenders ask borrowers to produce regular evidence a vehicle is in place or bar riskier borrowers from accessing interest-only deals.
Sue Anderson, head of member and external relations for the CML, said that the more onerous the requirements for lenders to check up on borrowers are, the less attractive interest-only would become.
She said: “We have to wait and see where the FSA lands and whether the result is that interest-only is theoretically allowed, but in practice doesn’t happen because the burden on lenders is too great.”
Lenders, including Northern Rock and Lloyds Banking Group, have already restricted the types of repayment vehicles allowed, and although the FSA does not wish to ban sale-of-property as an option, it could restrict it through setting maximum LTV limits, the types of customers who can use it or requiring lenders to asses it case-by-case.
Interest-only could also be restricted to first-time buyers, as a way to help stretch affordability.
Sally Laker, managing director of Mortgage Intelligence, said that lenders clearly recognised the problems faced by interest-only, but that more innovation was needed.
“We need to recognise that interest-only might be useful for people in the early years of homeownership and that their product could then switch to capital repayment. The question is what does the policy look like that guarantees repayment and will it be cheaper than capital repayment?” she said.
The industry has until 30 September 2010 to offer feedback on the FSA’s interest-only proposals.
