The announcement around the MMR, rather than clearing up the interest only situation, has only made it more unclear, says David Copland.
While it does not appear that the FSA intend to eradicate interest only, even the discussions around what may or may not happen to it have led to lenders tightening their criteria and making interest only incredibly difficult to come by.
What we mustn’t do is lose sight of the fact that while interest only may not be suitable for the mainstream, there is a very real need for it amongst a number of borrowers and maybe we need to think of a different way for people to access it.
When Nationwide pulled from the interest only market, it led us all to speculate whether other lenders would follow suit as a result. Usually when one goes, all the others follow, but that didn’t happen in this case probably because many lenders were waiting to see what the MMR brought before taking any clear actions.
The MMR process has had a lot to answer for, as many lenders have acted in anticipation of what they thought the regulation would be rather than seeing what it actually brought – and who knows how much pressure the FSA has exerted in the background, for different measures to be implemented by lenders even before the papers are finalised.
While it is probably sensible to make sure that interest only mortgages are not available indiscriminately regardless of whether someone has a means to repay it or not, there is definitely still a need for it – and not just amongst high net worth clients.
While there is a recurring risk of borrowers not having an adequate repayment vehicle in place, interest only could be used more creatively, for example, enabling people to take out an interest only mortgage for a period of time, so an interest only mortgage could be available to a professional first time buyer for the first two or three years of a mortgage to enable them to get on the housing ladder, and then revert to a capital and repayment mortgage at which point the borrowers are in a stronger financial position.
Alternatively an interest only option could be built in for a period of time as an option after someone has been made redundant or is down to one income because they have had a child. The mortgage would switch back to a capital and repayment mortgage afterward, with the mortgage term continuing from that period of time.
There is of course, always the possibility that someone would switch from one interest only mortgage to another every couple of years, but if, at each point, they need to put a repayment vehicle in place, there is a much greater chance that they will then have the means of repaying their mortgage.
For those borrowers who continue with their existing interest only mortgages and the few who will still be able to take them out it would be sensible both for lenders and advisers to check on a frequent basis whether a borrower has a repayment vehicle in place and whether it is enough to pay the mortgage off; once in the lifetime of the mortgage is not enough, as regular checks helps to keep it to the forefront of the borrower’s mind that it is no good putting off thinking about a repayment vehicle until the mortgage term is up and they then need to sell their house in order to repay their debts.
Although the cynic in me recognises that while a borrower may have a repayment vehicle in place on the day that the checks are done, there is nothing to stop them liquidating it a month.
Finally, it will be a relief to the adviser community that they will not be responsible for proving affordability; this was always going to be an onerous task, however any responsible adviser will still carry out their own analysis as any net disposable income needs to be identified for protection purposes. While the FSA now will not require advisers to prove a borrower’s income, the lenders will undoubtedly still require advisers to play a large part in collecting the data necessary, in the same way that they are doing currently with regards to quality of business.
David Copland is LSL director of mortgage services and head of The Mortgage Alliance