The MMR clearly retains the overarching ‘responsible lending’ rule, but one of the key elements of the reforms specifically focusses on interest only. In a nutshell, from April 2014, when the new rules kick in, lenders must assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.
So the future position is laid out, but what of the ‘interest only time bomb’ of existing loans as reported in various sectors of the financial press? We have been working with interested parties to establish what is really going on within lenders and their views on the issue.
We have been asking lenders how they will process an interest only loan at the end of the term. We have previously commented that we feel it unthinkable they will want to repossess properties at the maturity point and have received re-assuring noises from the majority, even those without a formal strategy in place.
Some lenders have commented that their obligations are limited to sending an annual letter reminding borrowers of their obligations to repay the loan at the end of the term. We do not agree with that as a universal policy – more needs to be done by lenders. This is not us jumping onto the ‘vulnerable customer’ band wagon either. We do believe this is a great opportunity to connect with customers, but also by addressing the issue early it could protect the value of their mortgage assets.
Being seen to have a proactive approach in dealing with regulatory and compliance issues will enhance not only the reputation of the lender, but could secure better value within the loan assets, and could lead to competitive advantage when the mortgage market returns to some normality.
We are always happy to help put in place proper strategies to help lenders and placate the regulators.