MSE News: RBS and Natwest demand £50k salary for interest-only mortgages

RenovationMan

The_J wrote: »

IO was never going to be banned completely and the banks are certainly going above and beyond the FSA requirements. I think they are trying to blackmail the FSA into watering down the MMR but because the regulatory authority is just a bunch of pathetic, socialist nobodies who can't make it in the private sector and led us blindfolded into this recession through lack of intelligence and proactivity, they are not going to realise this until it's too late.

It was never going to 'banned' as such, but banks were certainly considering whether to consider offering them due to the excessive costs of monitoring repayment vehicles compared with the low costs of repayment vehicles.

They now seem to be trying to get around having to monitor repayment vehicles by getting as many IO customers off their books as they can via the £50k salary and 50% LTV initiatives. Those remaining can be viewed as lower risk (esp. the 50% LTV customers) and so perhaps won't need quite the same level of monitoring.

Better these restrictions than having no IO mortgages at all. Besides, once the cluckers and frothers have moved onto other things, the banks can quietly expand their criteria - much lower profile than reintroducing a previously unavailable product.

The_J

Banks have never and will never have to 'monitor' repayment vehicles. At outset they are at most required to check that it is a reasonable and responsible repayment method.

I say required purposefully.

The banks would lend interest only, with no checks, up to 90% LTV if they could. They don't give a toss whether people have a repayment vehicle or not, if they repossess they get their money back. Hell, they'd lend up to 100% if house prices were rising.

These changes do not affect existing customers either, they won't be getting anyone off their books. In fact, those on interest only who don't fit the 50% LTV/income criteria (they aren't initiatives) and who want to stay on interest only will be mortgage prisoners, stuck with that lender.

Of course having interest only is better than nothing at all. Having malaria is better than having ebola but it doesn't mean that malaria is a good thing.

jamesd

Thrugelmir wrote: »

I've asked you many times but you've yet "to prove" your argument. What works for you (at the moment) , may not for many people.

Perhaps you want an answer that applies to everyone taking out a mortgage, which isn't possible, since interest only isn't suitable for everyone? I've given you perfectly sensible answers involving proper repayment vehicles and sensible loan to values which you seem to be discounting, perhaps because you just oppose all interest only lending.

Thrugelmir wrote: »

Assets prices are only high due to QE (on a global scale). The prop will be removed at some point.

Why on earth would that be a worry to someone with an interest only mortgage backed by investments that they are making ongoing purchases of? It just means that they will end up buying cheaper after QE is over and will still have many years for normal dividends and company growth to increase the value of their investments. Buying cheap is a good thing, not a bad thing.

You should really look at asset prices, though. They are at quite low levels historically in many markets. And quite high ones in a few.

Thrugelmir

The_J wrote: »

Banks have never and will never have to 'monitor' repayment vehicles. At outset they are at most required to check that it is a reasonable and responsible repayment method.

Lets wait and see.

In the original MMR responsible lending consultation paper (CP 10/16), published in the summer of 2010, the FSA outlined its views on the future of interest-only mortgages. We believed their initial thoughts were too onerous and would result in the withdrawal of most lenders from this part of the market.

The FSA suggested that lenders should:

check that there is a valid repayment method in place at the outset of the mortgage; and

monitor the existence and adequacy of the repayment method through regular inspections throughout the life of the mortgage. This could happen through checking on the continued existence of the repayment method, perhaps on an annual basis, with the adequacy of the method checked, say, every five years.

We agreed with the first statement. But the second meant that every year lenders would need to contact every borrower with an interest-only mortgage. In the response we submitted to the consultation, we queried how this could work. The lender would need to write to each customer, requesting proof of the repayment method. They would also need to chase with more letters and telephone calls if there was no response or inadequate proof was provided. They would also need to run anti-fraud checks to confirm that the proof provided was real.


Then, they would also have to check that the repayment method chosen by the borrower was performing adequately every five years. Making the lender effectively responsible for performance of the repayment method could lead to the borrower ignoring its performance. And if there was a capital repayment shortfall at the end of the term, the borrower could believe that they could legitimately make a claim against the lender, as they will consider it to have been the lender’s responsibility to identify and mitigate any potential lack of adequacy.

We believed this level of lender oversight was too complex and costly which is why it would likely result in the withdrawal of most lenders from the interest-only market.

In our response, our alternative suggestion was for the lender to collect proof that a repayment method exists at the point of sale. Then, once in the life of the mortgage they would re-validate the existence of the repayment method.

In order to ensure that the lender was not perceived to be taking responsibility for the performance of the repayment method, we suggested there should be an additional declaration in the KFI and/or mortgage offer. It should state that the customer retains responsibility for the repayment of capital and therefore the performance of the repayment method.

The new consultation

The paper published before Christmas (CP 11/31) included an amended set of proposals for new interest-only mortgages, which are broadly aligned with our response in 2010. We welcome the changes that the FSA has made and the recognition that interest-only mortgages remain an appropriate choice for some borrowers.

The FSA proposes that:

lenders must obtain evidence of the repayment strategy before entering into the mortgage, and that they lend only where, as far as they are reasonably able to assess, it has the potential to repay the mortgage.

We agree with this as it formed a key part of our original response.

We welcome the flexibility for lenders to determine when and how to check the repayment vehicle mid-term. The FSA says:

We are proposing that lenders must strengthen their management of interest-only lending over the mortgage term, by requiring the lender to contact interest-only borrowers at least once during the term of the mortgage, to establish whether a repayment strategy remains in place…

What the FSA does not do is say when that must happen, but leaves it up to lenders to take advantage of "natural contact points" where the lender is likely to contact the borrower for another reason or vice versa. The stipulation is, though, that the contact must come early enough before the end of the term that, if necessary, steps can still be taken to address the situation.

The FSA does go further than our 2010 response on the following point though. The end of the above paragraph states that "it is still reasonable to expect that it (the repayment strategy) has the potential to repay the mortgage."

This is a key issue for lenders, as we stated in our response, as they do not want to be seen as responsible for the performance of the repayment vehicle. The FSA rightly suggests that:

there is value in being alerted to potential issues when there is at least some time to consider remedial action, rather than waiting until the end of the term where options may be even more limited.

Lenders are still concerned about this. There is a risk that borrowers believing that, because the repayment strategy has been checked and cleared by the lender, it will 'definitely’ repay the capital. If the repayment method fails to perform adequately by the end of the mortgage term the borrower may believe that the lender is liable. The FSA clearly states that "the repayment of a mortgage is the ultimate responsibility of the borrower". But borrowers and the Financial Ombudsman Service will need to clearly understand that despite lenders having to assess the probability of the chosen repayment method meeting its target, borrowers, not lenders, will actually be responsible for the repayment method they choose.

What will make a suitable repayment strategy?

The FSA has decided not to tell lenders what should be a suitable repayment strategy, but rather, to a degree, allow the lender to choose based on each customer’s individual circumstances. Examples of suitable strategies are:

regular savings into an investment product;

sale of other assets, such as property or other land owned;

periodic repayment of capital from irregular sources of income (such as bonuses or some sources of self-employed income);

on death, for example in the case of a lifetime mortgage; or

sale of the mortgaged property, where this is a credible strategy because of down-sizing or repayment at death.

There are caveats though. The strategy must be appropriate and "credible given the circumstances of the consumer". It has also stated that purely speculative options, such as relying on house price growth and potential future inheritance should not be allowed.

Selling a primary residence and downsizing will only be classed as a credible strategy if the lender can confirm there will be enough equity to pay off the capital and buy another property. We believe this will lead to much larger deposits needed in this situation making it likely to be restricted to higher value properties only.

Conclusion

In its headline to the MMR consultation, the FSA stated that its aim was to "put common sense at the heart of mortgage lending." The proposals surrounding interest-only lending are certainly more sensible than originally planned but they will still constrain this part of the market.

By reducing the onerous requirement for annual checks on a borrower’s repayment strategy, the FSA has made it less likely lenders will pull out of the market. But lenders will still need to restrict the types of vehicles used for repayment purposes and ensure whatever repayment strategy is in place has a reasonable chance of paying off the capital. This will still give many lenders cause for concern, despite the FSA making it clear that borrowers, not lenders, will ultimately be responsible for the repayment of the capital.

But these proposals will do exactly what the FSA intends them to do – allow interest only to exist as a niche part of the market, but not as an everyday choice for borrowers.

Thrugelmir

jamesd wrote: »

perhaps because you just oppose all interest only lending.

Not at all. I base my personal views on my experience on how the majority of people in both their personal and business lives manage finance. What determines an individuals choice of mortgage if given an option, is their attitude to risk and risk taking.

michaels

I still think over 25 years most people who bought a home with a 60% deposit on an IO basis woud be better of than those who paid the same in rent as the IO payment for 25 years, regardless of repayment vehicles etc.

Yes this is an assumption that property as an asset class will perform well but to me, as you will always want to have a property throughout your life, the speculative course of action is not to hold assets in property.

Does the FSA ask that landlords vet renters to ensure they have a strategy to house themselves on retirement?