Answering questions at the CML conference, Nicoll, head of conduct policy at the FSA, said that the regulator recognised that there is a place for interest only in the mortgage market, but only when used in a sensible way.
While she would not be drawn on what the FSA will propose in the imminent MMR paper, she highlighted that it was not an area it has consulted on, despite the level of debate around the area.
Nicoll said: “I think we would all recognise that there have been times that interest only has been used to stretch affordability, so we will aim to put interest only back where it should be.
“In the past it has gone too far, but the MMR is not just for constrained times, but the boom times.”
However, in the same discussion, CML chairman and HSBC head of lending Martijn can der Heijden said that he strongly disagreed with the FSA’s view that lenders have changed their interest-only policies because something is wrong with the product.
He said: “It is a circular argument.
“Lenders have got to be fearful of the regulator, but that doesn’t mean interest only is or was a bad product that needs to be restrained.
“There are a lot of reasons to have interest only. Interest-only borrowers perform better than capital repayment borrowers because of their profile. It is not an area to panic on. We need to make sure that, in striking a balance, we don’t throw the baby out with the bathwater.”
CML director general Paul Smee added that he hoped interest-only’s role in a healthy mortgage market was recognised by the FSA.
