The Financial Conduct Authority’s (FCA) Mortgage Crackdown on Interest Only

Interest only mortgages have now been in the spotlight with the UK property market for quite some time. This escalation in best interest only mortgages is particularly concerning as it commenced when people were borrowing increasingly excessive amounts. At the same time low cost endowments which were the traditional investment product sold as the repayment vehicle for an interest only mortgage was dying out. The timing could not have been worse.

Essentially, this resulted in many new borrowers drafting their main plan for mortgage repayment by relying on house prices to keep rising.

This is where the FCA intervened
Their mortgage market review and subsequent proposal forced lenders to have a much tougher stance on UK interest only. Lenders would now have evidence how they assess affordability by using interest only calculators. This would compare the cost to a repayment mortgage and then stress test the mortgage borrowers to ensure they could maintain the monthly payments. This could additionally be checked to see if affordability was an issue once they then revert to a standard variable rate and the mortgage interest rate increased to 2%.

This toughened approach has resulted in most mainstream mortgage lenders ceasing to offer an interest only mortgage unless a savings vehicle such as an ISA is established and evidence of monthly premiums paid. Lenders have also removed the ability of the mortgagor using the sale of property as the repayment vehicle or even an inheritance.

Under these tough conditions you may not want to seek out an interest only mortgage as the main means of purchasing a house. There are definite disadvantages that can be quite costly at the time of repayment. It is certainly a mortgage that requires discipline.

Retirement Interest Only Mortgages
You may wonder why if interest only mortgages are a dying breed there are still lifetime mortgages being touted online with an interest only option. The truth is mortgage lenders are even cracking down on these retirement mortgages too. Many providers have decided to put a 10 year cap on their product making it only available to someone who is 65 or older. They cap the borrowing age at 75, as well as make the product repayment due in 10 years. It means if you are 65 years of age you need to repay it at 75.

While the FCA did intervene for standard interest only products, the retirement product is still based on selling the house as a means of repayment. The idea in this mortgage is that you are beyond needing the house, need to downsize, or need a long term care facility. In this way it does not matter that you have to sell the house to repay the lifetime mortgage.

Since you can still pay the interest during the period you have the retirement mortgage, this leaves only the principle amount to be paid on the sale of the house. This is a specialty mortgage unlike the regular interest only mortgages for first-time homebuyers and the like.

It takes special consideration and a definite need to speak with a qualified lender to seek advice. You also want to gain independent advice from a financial broker to ensure you have the entire picture.

The FCA entered into a crackdown regarding all interest only mortgages because of scams and the ability of homeowners to repay the expensive product. Scams are usually more prevalent for people in retirement age.

Protecting You and Your Family
It is imperative that you protect your family with their inheritance. You cannot depend on your home retaining its value as we have seen in the recent years of subprime mortgage crashes. Housing prices can fall when inflation gets to be too much.

While it is a nice thought that interest only lifetime mortgages can help you during retirement, you also want to make certain your family is okay with you putting the family home in danger. They may be able to find a different solution to your retirement spending needs.

You may also wish to consider working beyond average retirement age. While retiring at 55 to 65 is nice, inflation and rising prices has essentially assured us that we need to work longer and keep in better health.

The FCA understands this and has worked diligently to ensure homeowners are aware of options and potential pitfalls by regulating the industry a little better. Seek advice about interest only mortgage schemes to make the proper decision and protect your financial future for you and your family.

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