The regulator arguably did not foresee the industry’s wholly negative reaction to its proposals and has subsequently repeatedly insisted it has no intention of banning interest-only mortgages.
Nevertheless, lenders have pre-empted the regulator by implementing increasingly strict criteria for interest only, restricting repayment vehicles, maximum loans and LTVs.
Most notable are the moves of Lloyds Banking Group, which only recently lifted its year-long maximum loan limit for interest-only deals from £500,000 to £1m.
It is clear the FSA remains deeply concerned about the product and the reasons why borrowers opt for interest only alongside their ability to repay the loan.
Clearly, the tough criteria facing borrowers attempting to secure interest only has significantly reduced the numbers accessing such loans.
Yet, the FSA’s figures have revealed that over the last three years up to 300,000 households have moved £60bn-worth of mortgage debt from repayment to interest only, the majority of which was down to lender forbearance.
However, brokers themselves are not seeing this move from clients. A recent Mortgage Solutions poll revealed that half of readers are approached by clients who want interest-only deals because of cheaper payments, while just 3% said it was down to lender forbearance and 6% debt management.
Andy Pratt, chief operating officer at Alexander Hall, says that it has seen a significant shift in new business from interest only to capital repayment.
He says: “People are staying on their mortgages for three or four years, because they don’t need to move. If they had, they would have found it much tougher. Others that have remortgaged have gone to capital repayment.”
The most significant issue affecting interest only are the “oddities” in criteria that vary from lender to lender, Pratt says.
“All lenders have quirks and it is these that are the problem. I would rather see more transparency, as brokers aren’t clear whether the criteria that is stated is necessarily followed and they can’t give a good service to their client as a result. Interest only criteria vary wildly to the disadvantage of the customer.”
Indeed, David Sheppard, managing director of Perception Finance, says that things will get increasingly difficult for borrowers if more lenders move towards Lloyds’ tough stance.
He believes that many lenders are running scared of potential retrospective regulation on interest only, following a raft of fines for irresponsible lending and PPI mis-selling.
Sheppard says: “An element of common sense around interest only is being eroded. If someone has decent equity in a property, which should only improve over a long period, or irregular pay structures, then interest only is reasonable.
“But you only have to look at the retrospective fines the FSA has given out. Lenders see that they have been hit with fines for things like PPI and they can’t take the risk of further rules being backdated.”
However, Sue Anderson, at the CML, believes that regulation is only one small aspect of why lenders are restricting interest only.
She says: “The concept of retrospective regulation is something that looms large, because previous products and practices that seemed fine turned out not to have been and it has cost lenders.
“However, the market, house prices, prospective appetite and capital requirements are all driving how lenders approach interest only.”
Yet, the need for clarity from the regulator on interest only is increasingly urgent for everyone in the industry.
Sheppard says: “A clear message needs to be made soon. It is a concern that we will get more and more lenders making decisions on what could happen. But I think that once the finalised rules do come out, lenders making decisions that seem hard now will back track.
“However, we will still have a period of volatility down the line.”
Nevertheless, Sheppard does see a positive side to the difficulties borrowers now have in securing an interest-only deal: “What it will do is drive people to use a broker, because if they find their own lender won’t help them, then they need to find an alternative.
“Of course, it’s only beneficial is some lenders are prepared to take a common sense view.”
The message is clear from all in the industry, including the FSA, that interest-only deals do have a place in the market for certain customers.
However, the lack of clarity from the regulator and lenders is helping no one, least of all brokers attempting to advise their clients appropriately.
One thing we can be sure of is that change is coming, by way of the regulator’s rule book. The question, as ever, remains when?
