Towards the end of 2012, and into the first quarter of 2013, mortgage lenders have begun to restrict the ability for borrowers to access interest only mortgages as a repayment option for their loans. The move has been made as a reaction to new rules the Financial Conduct Authority (FCA) are planning to implement from 2014, which will see stricter guidelines for mortgage affordability checks employed by the lender.
From April 2014 the FCA will enforce rules to govern UK mortgage lenders processing and underwriting, when assessing a borrower’s ability to repay a loan. The foremost reason for the revisions to the regulators stance, are due to a broad concern that lenders previously took a free hand with interest only loans, while property prices were on the increase. It is claimed that underwriting checks were not rigorous enough in all cases, and the regulator is concerned that the assessment of a borrower’s repayment plans were not as thorough as they were expected to be.
Although the plan for the FCA has always been to ensure lenders have a tighter rein on who they allow to finance a mortgage via the interest only method, the fear now is that most UK lenders have reacted in an extreme manor to the news. In some cases, the regulator is concerned that many borrowers already utilising the method may be left out in the cold, with no option to remortgage their current debt.
Martin Wheatley, head of the FCA, commented on the issue: “There are two sides to the risk equation – consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products.” It appears that the regulator wanted to corral mortgage lenders lax approach to the checks involved in interest only applications, but at the same time retaining options for borrowers that the methodology was always intended.
The banks may argue that they have wisely restricted interest only availability to those who fit the FCA bill of an acceptable applicant, but others do not concur. Simon Butler of mortgage broker, Contractor Mortgages Made Easy, said: “While it’s sensible to make sure that applicants are no longer able to apply for an interest only loan with nothing more than an ISA as their repayment plan, it’s not so sensible to set a requirement to have 50% equity left in the property, or a minimum loan size of £300,000, as lenders such as Virgin Money and Woolwich have chosen to implement.
“The problem this creates is a market where some borrowers will have to switch their mortgage onto a capital repayment process to refinance their debt otherwise they may have to sell their homes or move in order to retain a property.”
At present, many lenders have gone to the extreme step of completely removing interest only as a repayment method, or at least not offering it to new borrowers. HSBC have joined Natwest, Coventry Building Society and Co-Operative Bank on this path, but in some cases will accept applications if an existing borrower can meet their tighter criteria.
Other banks have chosen to restrict borrowing on interest only by imposing lower loan to value brackets, or requesting a higher minimum salary or a minimum existing savings and investments pot. Clydesdale Bank have introduced a scheme where-by an applicant can take an interest only mortgage for the first three years of the loan, but will need to convert the mortgage to capital repayment in the fourth year. Santander have strictly set a 50% marker as the maximum loan to value level for interest only mortgage borrowing.
Ultimately, the message is clear that lenders are taking no chances once the FCA begins to assess their individual approach to underwriting interest only mortgages. The frustration for borrowers as always will be that the same groups that potentially damaged the economy, because of poor decision making on past lending criteria choice’s, will now yet again cause further acrimony in their attempts to cover themselves from further reprimands. It does not appear that any amount of complaint from the FCA will sway lenders to loosen in-house criteria on the interest only proposition.
Article by: Lucy Edmunds, Media Executive at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 0844 44 88 80