Wednesday, September 8, 2010

Renting from the Bank might no longer be an option

FSA could kill off interest-only, warns CML

The Council of Mortgage Lenders says the Financial Services Authority risks killing off interest-only mortgages if it goes through with the proposals in its Mortgage Market Review. In its latest issue of News and Views the CML says lenders taking responsibility for the performance of the repayment method could lead to the withdrawal of interest-only mortgages from the market. It says in the current risk-averse lending environment, with the FSA adopting a more interventionist and prescriptive approach, firms will react cautiously to a tightening of the rules on interest-only mortgages.

Posted by jack c @ 04:34 PM (1950 views)
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13 thoughts on “Renting from the Bank might no longer be an option

  • The FSA risks killing off interest only mortgages

    That’s as novel a definition of risk as I’ve ever seen.

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  • Moving from interest only mortgage to repayment type will push up the monthly repayments.

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  • No, it will push up the cost but start to make a repayment.

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  • it will reduce the overall cost, especially at the end of the mortgage term, very few people can expect to have a wad of cash to pay down the final lump without selling their house, so it will also reduce overall pain too..

    only fools buy with interest only without any repayment plan

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  • @alan – some lenders are already looking to move borrowers onto capital repayment when their existing deal comes to an end – typically fixed rate or tracker deals and as you rightly point out this will raise the monthly payments. In turn this might lead to forced sales based upon affordability.

    The CML amongst others are more concerned that if IO is effectively outlawed by the FSA then it will act as a barrier for many to enter the residential property market – in recent years lots of FTB’s took IO mortgages as this was the only way they could get on the ladder – strip this option out and add in the requirement for a hefty deposit and FTB’s will be a rare species. This would then put further downward pressure on house prices.

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  • tenyearstogetmymoneyback says:

    alan said…Moving from interest only mortgage to repayment type will push up the monthly repayments.

    I disagree. Not having interest only mortgages available will tend to push down the cost of houses.
    Unless even more legislation e.g. maximum salary multiples, is introduced monthly repayments will stay at
    what people think they can afford to pay.

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  • The ability to obtain ‘interest only mortgages’ has without doubt been at major prop of high house valuations. Once removed…

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  • About time the FSA started doing its job!…Suspect they are worried about cuts… As they should be.

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  • Correct me but the whole interest only trick is relatively recent – say 15 years? With a repayment mortgage, the LTV has an added tendancy to decline in a way that doesn’t happen with interest only. Furthermore the LTV may have an implicit tendancy to decline via inflation; except that we are probably about to hit deflation. For those two reasons I think lenders will become less keen to sidestep the repayment route – endowments will also be frowned upon, along with mortgage equity withdrawals.
    Doubtless they will think of something else but I sense that things could be painfully unimaginative for a while.

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  • I see little difference between self cert and IO as they clearly, in most cases, show the borrower can’t afford the payements on the mortgage sum applied for.

    More downward pressure on prices on a ’25year’ mortgage term.

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  • watching with amusement says:

    What amazes me is the amount of vitriol against the FSA for proposing such a move, suggesting that they shouldn’t be sticking their noses into others’ business as they’re grown ups who can quite happily have an interest only mortgage with no way of repaying it. I am just flabbergasted.

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  • The CML are probably afraid that someone will twig that allowing a person to take a loan out without checking a plan to repay the capital and then with a salary that has hitherto not required to be verified is gross negligence of the first order.

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  • tenyearstogetmymoneyback says:

    sureseam said “Correct me but the whole interest only trick is relatively recent – say 15 years?”

    You are correct on that.

    Endowments have been around for much longer, but when I took out mine in 1989 the Buiding Society insisted that
    thay held the policy so that when it matured they would have the money to pay off the mortgage. Any left over would then
    be given to the mortgagee. I know that some endowments have performed poorly but at least they will pay off a large(ish)
    proportion of a persons mortgage.

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