The Building Societies Association (BSA) has today responded to the Financial Services Association (FSA)’s Mortgage Market Review (MMR) on responsible lending with specific emphasis on interest only mortgages.
The BSA remains concerned with the overall direction, impact and timing of the FSA’s MMR. It is concerned that the MMR does not cripple the recovery, either as a result of a disproportionate response to the perceived failures it aims to address, or by being over zealous or overly hasty in its implementation. The FSA, through the MMR, should be exploring how responsibility is balanced between the parties, and in particular how to raise consumer financial capability and encourage responsible borrowing.
Historically, interest only mortgages were popular among many borrowers. Though this trend has been in reverse for several years, there are some risks with interest only mortgages, principally the absence of a suitable repayment method which leaves the borrower exposed at the end of their mortgage term and unable to repay the capital remaining on their loan. However, this risk can be mitigated, according to the BSA.
The FSA may regulate the area so that lenders become responsible for checking that consumers have a strategy in place to repay the capital amount at the end of the term, in which case solicitors may be asked to take mortgages or assignments of endowment policies as they did in the past. However, the BSA does not believe it is appropriate for a lender to take responsibility for carrying out regular checks on the adequacy of repayment plans.
Lenders may not possess the necessary expertise to be able to carry out such a role particularly when complex investments are being relied upon. Instead it should remain the responsibility of the borrower, with support from their advisers, to ensure that any investment is performing sufficiently well to repay the capital. If not then reminders from the lender should prompt them to take action or contact the lender if they have concerns. Lenders have taken many steps in recent years to tighten their lending controls particularly in the area of interest only mortgages. Therefore, many of the FSA’s concerns have already been identified and are being resolved by the industry. Lenders remain concerned that tight, and disproportionate, regulation of this product area will see many mortgage providers withdraw from this market altogether. This will have a significant and detrimental effect on many existing and future homeowners and may cause the market to revert to capital and interest repayment vehicles to satisy consumer need. Currently interest only mortgages serve a useful purpose and provide valuable choice to many worthy customer groups. Interest only mortgages must be allowed to continue to serve these customers. Key among these are some first time buyers, high net worth customers and those purchasing second homes.