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October 1, 2010    

Interest-only mortgages under threat

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by Gill Montia

The Council of Mortgage Lenders (CML) is warning that new measures proposed by the Financial Services Authority (FSA) could result in the demise of the interest-only mortgage.

The FSA is currently consulting with lenders and other interested parties on the future regulation of the UK mortgage market, and the CML claims that interest-only home loans will “effectively vanish” if the proposals are implemented.

According to the Council, the cost of having to check the existence of borrowers’ repayment methods each year, and make a judgment on the adequacy of the repayment method, would prove prohibitive.

The proposed new rules reflect concerns that interest-only borrowers can end up with a shortfall at the end of a mortgage term.

However, the CML claims that the number of borrowers likely to find themselves in this position is “extremely low” and in any event, lenders are normally able to arrange an acceptable repayment plan.

CML director general, Michael Coogan, comments: “Interest-only mortgages are an appropriate choice for a range of different types of consumers, including borrowers who rationally choose them as an alternative to renting, financially capable customers who make acceptable arrangements to repay the capital over the long term, and buy-to-let investors.”

He adds: “We do not want to see measures that would effectively regulate them out of the market.”

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