MORTGAGE MARKET REVIEW –
REGULATION OR MARKET CREATION & CONTROL
How will this affect you, the
consumer?
As consumers you may or may
not be aware of the Financial Services Authority’s mortgage market review. This was a review conducted by the FSA over
the last few years, of how the mortgage market conducts itself. This review was heavily influenced by the
financial crash in 2008. The FSA issued
the policy statement (PS12/16) and the final rules which will come into effect
on 26 April 2014. However, in the
majority of cases, most lenders have anticipated these rule changes within
their criteria or have already put into force those items raised by these new regulations. These new regulations fundamentally alter the
mortgage market for you as consumers.
So, I would advise all consumers to make themselves familiar with some
of these new regulations. The following
is an example of the type of changes and how it will affect you, but I would
suggest that the regulator is not regulating but defining the market.
INTEREST ONLY MORTGAGES
An example of how these regulations
will affect you is a very lose term called responsible lending. These terms are deliberately lose so that
each lender may interpret, and therefore be hung by, the regulations themselves. So, how does it affect interest only? The majority of lenders will now not accept
interest only in its strictest sense unless the loan to value is extremely
small and is backed up by investment products such as endowments. Given the fiasco in the past over endowments
and miss-selling of endowments, in effect this kills the concept of an
endowment-linked interest only mortgage.
Also these interpretations go further; in the past if you wanted an
interest only mortgage you would set up a repayment vehicle such as an
endowment or modern day an ISA at point of application. However, these new changes preclude this as
the endowment or ISA needs to be existing prior to application. This wasn’t even a requirement before the
endowment miss-selling scandal.
Therefore again, killing new interest only, asset backed mortgage
applications. Only those clients who have
been on interest only with asset baked provisions can obtain a new interest
only mortgage. How about if you wanted
an interest only mortgage on the basis of selling your property to
downsize? There are a handful of lenders
that will consider this but, of those, the majority will only accept the application
if you can prove that you either have 50% loan to value and/or sufficient
equity and capital resources to have over £150,000 at the end of the mortgage
term. So, again, this kills the interest
only mortgage market.
But why is this a problem? When comparing the financial benefits of a
repayment verses an asset backed interest only mortgage, or indeed resale of
property interest only mortgage, one should consider investment returns long
term versus interest rates and also house price increase on the basis of later
sale. Right now, the Bank of England
base rate is ½% so I think most people would agree with me that we are in a low
interest period. I think most people
would also agree that house prices are at an all-time low. Also, one has to consider that if you were to
put £10,000 in a cash- based ISA you can achieve a return of 3 or 3½%. One wold also suggest that if you were to put
your money in an equity based ISA whilst very volatile, again it would be fair
and reasonable to suggest that you would achieve 5% return in the medium to
long term. So if these are compared,
clearly from a financial point of view it would be fair to suggest that an
asset based mortgage would be financially more astute than a repayment mortgage. Classically, in a high interest rate period,
a repayment mortgage is better than as asset backed product on the basis that
one would have to achieve such high levels of growth to outperform the high
interest rate. With this in mind I would
actually argue that, right now, interest only should not be being killed by the
regulator as it is a fully justifiable and potentially financially astute
repayment method, but if the only people that can have it are those detailed
above, ie those that have already had it, then the regulator is controlling the
market not regulating the market because, clearly, one should be allowed to
consider this type of arrangement.
If you would like more
information on how the mortgage market review may affect you or require
financial or mortgage advice please contact 01636 870 069 for your free
consultation.
Philip Dales Dip PFS Certs
CII (MP & ER)
DALES Independent Financial
Advisors, are a whole of market mortgage broker and Independent Financial Advisors.
Authorised and Regulated by the Financial Services Authority.
