FSA warns of tough times ahead as £120bn of interest-only loans are due for repayment

Published on Monday 19 December 2011 01:09

An ESTIMATED £120 billion of interest-only mortgage loans due for repayment over the next ten years will present a “significant challenge” for lenders and consumers, the Financial Services Authority (FSA) warned in its report.

The mortgage product, under which the principal sum borrowed only becomes payable in full at the end of the term, was popular in the last property boom, as lenders became less strict about the repayment strategies accepted.

Under its proposals today, the FSA said lenders would be able to continue to offer the product as long as borrowers had a credible repayment plan. This did not include relying on higher house prices or an expected inheritance.

The FSA said its calculations showed that some 1.5 million interest-only mortgages, worth £120bn, would be due for repayment in the next ten years.

“The risk of an increasing number of interest-only mortgages reaching maturity without adequate repayment strategies is likely to pose a significant challenge for both consumers and lenders alike over the coming years.”

The FSA is planning further research on the potential crunch, but praised the Council of Mortgage Lenders (CML) for working with its members to identify appropriate ways of assisting those interest-only borrowers without sufficient means to repay the capital by the end of the term.

The regulator added: “In doing this, it seeks to ensure that those borrowers who actually experience a capital repayment shortfall are treated fairly, with repossession remaining the last resort.”

The FSA wants interest-only mortgages to be considered as a “niche” part of the market, but said it had no plans to restrict their use as a means of forbearance by lenders to help struggling homeowners.

Its proposals recommend that affordability is assessed on the basis of both capital repayment and interest. When lenders assess affordability on an interest-only basis, there must be a “clearly understood and believable alternative source of capital repayment”.

Lenders should also carry out a review at least once during the mortgage term to check that the consumer’s repayment strategy is still in place.

During the mid-1980s and early 1990s, interest-only mortgages became attractive because of high interest rates and a favourable investment environment, making it the preferred choice of repayment to such an extent that by 1988 they accounted for more than 80 per cent of mortgage sales.

However, falling interest rates and endowment mis-selling scandals forced this rate back down to just over 10 per cent of mortgage sales by 2002.

Then, as lenders became less strict about the repayment strategies accepted, the property price boom fuelled a new surge in interest-only mortgages, peaking at a third of all mortgage sales in 2007.

However, unlike in the 1980s and 1990s, around 75 per cent of interest-only mortgages in 2007 had no reported repayment vehicle.

Sales of such products now account for fewer than 20 per cent of mortgage sales.

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KINGFISHER1

Monday, December 19, 2011 at 11:00 AM

Sharp intake of DRAGON BREATH. RESERVED and REDACTED COMMENTS. I have already clarified FULLY!!!

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