The New Mortgage Drought
The Council of Mortgage Lenders (CML) has responded to the consultation implemented by the Financial Services Authority (FSA) on interest only mortgages. The FSA are proposing that lenders will be required to annually check the repayment methods borrowers have in place. The CML suggest that the costs associated with this compliance will be so prohibitive that interest only mortgages are likely to vanish from the market. Although the CML does concede that lenders are currently being exposed to risk by borrowers who do or are likely to have a shortfall.
Michael Coogan, CML Director General said:
“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.
“We do not want to see measures that would effectively regulate them out of the market, and we believe it is possible to address the FSA’s concerns, without imposing costs and requirements on lenders and borrowers that are likely to prove to be unacceptable.”
The CML has also said that it believes 51% of all mortgages granted between 2005 and 2009 would have been refused if the FSA had already implemented its proposed rules on mortgage lending. That would be a staggering 3.8 million borrowers barred from borrowing, or at the very least the amount they wanted to borrow.
Part of the proposed changes includes the restriction of borrowers from using any more than 35% of their income (post-tax) on mortgage payments.
Not only that mortgage lenders would also have to assess the affordability of the mortgages they are offering based on a rate up to 2% higher than the mortgage they are applying for.
A spokesman for FSA said: “Our proposals are designed to address the major failures that have occurred in the mortgage market and we are actively consulting with all stakeholders to ensure we get the right solution.”
But Michael Coogan, of CML, said: “”The current proposals sacrifice far too many borrowers and do not chime with our recent research on the levels of consumer aspiration to become homeowners in the future.
“It is a question of striking a balance between protecting the minority, who might get into arrears, and providing opportunities for the majority, who want to become homeowners.”
So it seems that although some measures are required to ensure prudent lending, any introduction is likely to push the mortgage market deeper into famine.