“The responsibility for repaying an interest-only mortgage remains with the borrower,” said the regulator.
“The lender cannot be held responsible if what appears to be a credible repayment strategy at the point of underwriting does not deliver.”
Lenders must determine each borrower has a credible repayment vehicle in place at the point of underwriting. But again, the borrower is responsible, not the lender, if any checks reveal a problem with the repayment strategy.
The regulator said it is taking a non-prescriptive approach to repayment strategies, as long as they are “clearly understood and credible.”
“All we expect a lender to do at the time of underwriting is to assess, as far as it is reasonably able to do so, that the repayment strategy has the potential to repay the capital, and nothing more,” said the FSA.
The lender must demonstrate it has made a ‘reasonable effort’ to contact the borrower to check a vehicle is in place, flag any problems and check the vehicle could repay the mortgage. Lenders can then request documentary evidence of a repayment vehicle if they wish, but evidence of a check is sufficient.
The FSA has excluded bridging loans from the interest-only checks, due to the short-term nature of these arrangements.
Far from a slow death for these products as the industry has long feared, interest-only is likely to become a niche product as lenders follow their own lending strategies, said the FSA.
“There is a consensus view that interest-only should be a ‘niche’ product. We expect most mainstream lending to take place on a capital and interest basis,” it said.
However, the rules state a borrower does not have to be assessed on a capital and repayment basis for an interest-only loan if applying for the same loan amount. However, lenders must assess affordability on a capital and repayment basis, if the applicant wants a further advance.
Lenders must explain misconceptions and clarify individual borrower responsibilities, especially on outcomes if things go wrong, said the regulator.
Bill Warren, managing director of Warren Compliance, said: “I think common sense has now prevailed and there is now no reason for lenders to treat [interest-only] as high-risk. The recent overreactions of lenders in withdrawing from this market have been anti-consumer and out of touch with what borrowers want and need.
“Placing more responsibility on lenders to account for affordability is [a] sage move, although intermediaries must be clear about each lender’s approach and the third party distribution channel as a whole must ensure lenders don’t use this as an excuse to ease them out.”
