Will interest-only mortgages become the next mis-selling scandal?
This week the UK’s biggest building society, Nationwide, announced that it will no longer offer interest-only mortgages for new borrowing.
The lender did not give much of a reason for its decision just that it only represents three per cent of its mortgages and that “evidence shows that its borrowers increasingly want the certainty that repayment mortgages can provide.”
Interest-only mortgages allow borrowers to just repay the interest on their borrowing, not making any dent in repaying the capital. A separate repayment vehicle is supposed to be set up to save up to repay the capital at the end of the mortgage term.
But before the credit crunch when the lending environment was different, this did not always happen.
It means that interest-only mortgages could become a niche financial product only available from private banks.
The Nationwide said: "Interest-only has become a niche product for us."
However, many analysts believe that there may be a political reason behind Nationwide’s decision.
There is growing speculation that interest-only mortgages may be the next big mis-selling scandal. Before the credit crunch unsuitable financial products and advice was not just confined to investment banking.
As well as PPI being sold to people without them knowing, interest-only mortgages were advanced to people with no repayment vehicle in place to enable homeowners to invest money to pay off the capital at the end of the term.
The Financial Services Authority (FSA) published its mortgage market review in December 2011 and it contained its first formal consultation on interest-only mortgages.
The main thrust of its recommendations are that common-sense lending must prevail, that lenders must assess the suitability of an interest-only mortgage by making sure there is a “believable source of capital repayment.”
In two weeks time the FSA will publish rules on how interest-only mortgages should be handled. The FSA is certainly not looking to ban them, just make sure that lenders ensure that a credible repayment strategy is in place before they offer this type of mortgage.
Now, my take on this is that the financial climate before 2007 was obviously different to today and a long list of the mistakes that were made is easy to compile.
The FSA is right to make sure that the rules surrounding interest-only mortgages are in place and that lenders adhere to them but it was not only lenders that made mistakes when 100+% loans were being offered.
Consumers have to take some responsibility too. Like financial services companies and banks, consumers are hopefully learning from the mistakes of the past as well.
Borrowers have to understand that they are doing just that – borrowing money – that needs to be paid back and while it should be a lenders job to check that a repayment structure is in place and only lend appropriately, consumers need to take some responsibility too.
And it is probably true that both consumers and lenders have realised this. That is why it is now so difficult to get a mortgage and why Bank of England figures this week showed that for the 17th consecutive quarter consumers have been repaying more mortgage finance than they have been borrowing.
It is no coincidence that 17 quarters ago was the summer of 2008, about the same time as both consumers and borrowers realised the folly of some of the institutional and personal finance strategies that were being followed were a big mistake that we continue to pay for.
So, will there be a mis-selling scandal over interest-only mortgages? I am not sure. I think both sides of the argument need to take responsibility and learn the lessons from past mistakes but it is certainly correct that the regulator provides clear guidelines going forward.
Like many contributing aspects to the financial crisis, it is just a shame that globally, not just in the UK, regulators, governments, financial institutions and consumers did not make sure prudent behavior was being followed at the time.
The lender did not give much of a reason for its decision just that it only represents three per cent of its mortgages and that “evidence shows that its borrowers increasingly want the certainty that repayment mortgages can provide.”
Interest-only mortgages allow borrowers to just repay the interest on their borrowing, not making any dent in repaying the capital. A separate repayment vehicle is supposed to be set up to save up to repay the capital at the end of the mortgage term.
But before the credit crunch when the lending environment was different, this did not always happen.
It means that interest-only mortgages could become a niche financial product only available from private banks.
The Nationwide said: "Interest-only has become a niche product for us."
However, many analysts believe that there may be a political reason behind Nationwide’s decision.
There is growing speculation that interest-only mortgages may be the next big mis-selling scandal. Before the credit crunch unsuitable financial products and advice was not just confined to investment banking.
As well as PPI being sold to people without them knowing, interest-only mortgages were advanced to people with no repayment vehicle in place to enable homeowners to invest money to pay off the capital at the end of the term.
The Financial Services Authority (FSA) published its mortgage market review in December 2011 and it contained its first formal consultation on interest-only mortgages.
The main thrust of its recommendations are that common-sense lending must prevail, that lenders must assess the suitability of an interest-only mortgage by making sure there is a “believable source of capital repayment.”
In two weeks time the FSA will publish rules on how interest-only mortgages should be handled. The FSA is certainly not looking to ban them, just make sure that lenders ensure that a credible repayment strategy is in place before they offer this type of mortgage.
Now, my take on this is that the financial climate before 2007 was obviously different to today and a long list of the mistakes that were made is easy to compile.
The FSA is right to make sure that the rules surrounding interest-only mortgages are in place and that lenders adhere to them but it was not only lenders that made mistakes when 100+% loans were being offered.
Consumers have to take some responsibility too. Like financial services companies and banks, consumers are hopefully learning from the mistakes of the past as well.
Borrowers have to understand that they are doing just that – borrowing money – that needs to be paid back and while it should be a lenders job to check that a repayment structure is in place and only lend appropriately, consumers need to take some responsibility too.
And it is probably true that both consumers and lenders have realised this. That is why it is now so difficult to get a mortgage and why Bank of England figures this week showed that for the 17th consecutive quarter consumers have been repaying more mortgage finance than they have been borrowing.
It is no coincidence that 17 quarters ago was the summer of 2008, about the same time as both consumers and borrowers realised the folly of some of the institutional and personal finance strategies that were being followed were a big mistake that we continue to pay for.
So, will there be a mis-selling scandal over interest-only mortgages? I am not sure. I think both sides of the argument need to take responsibility and learn the lessons from past mistakes but it is certainly correct that the regulator provides clear guidelines going forward.
Like many contributing aspects to the financial crisis, it is just a shame that globally, not just in the UK, regulators, governments, financial institutions and consumers did not make sure prudent behavior was being followed at the time.
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