Mortgage Market Review & You

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.