Even before the FSA Mortgage Market Review consultation, true interest only mortgages were coming under fire. Lenders are tightening their criteria and making it more difficult for customers to obtain interest only mortgages. Some lenders are now forcing customers with loans over a specific loan to value or even loan size to pay their mortgage on a repayment basis.
Interest only mortgages have come under pressure before. During the ‘last time around’, as the previous tsunami of negligence claims is becoming known, many argued that lenders losses would have been smaller if they had not allowed so many new borrowers to obtain interest only mortgages.
Although the arguments appealed to the popular press, they did not stand the test of critical scrutiny, as very little debt reduction is made on a ‘traditional’ repayment mortgage in the first five years.
It appears to us that the current tightening of criteria is more to do with funding than regulation or risk. We doubt lenders would be restricting their policy if we were back in a world of £300bn + annual gross lending.
Taking out the hype, clearly repayment is the right product choice for some customers while interest only is the correct option for others. When reviewing a past underwriting decision, it is the circumstances as a whole that need to be considered, not just a rigid policy.