Greater controls needed for interest-only

Under the Mortgage Market Review the validity of the repayment vehicle must be checked by the lender and monitored throughout the term of the mortgage but the type of the vehicle is not specified.

Noakes said: “The Financial Conduct Authority has not been prescriptive in saying what the repayment vehicles are permitted to be, it’s up to individual lenders.

“Downsizing is a repayment vehicle but needs additional controls – for example what is the level of minimum equity and maximum loan-to-value that you would consider lending.”

Noakes said that latest data released on lending volumes showed that interest-only accounted for 20% of mortgages, compared to 33% at the peak of the market, but he could see this dropping to a single digit after MMR.

He added: “Lenders have already decided to exit interest-only and we have restricted the business we do.”

Phil Cliff, retail assets director at Santander, agreed that greater controls were needed.

He said a young couple who chose to take a mortgage on an interest-only basis to keep costs down with the intention of selling the property at the end of term may feel differently when the time arises.

He sees the path of the interest-only market leading to a greater reliance on more than one repayment vehicle in addition to the sale of the property.

He said: “Whether [the market] goes down to a single figure depends on customers’ ability to conform with alternative repayment vehicles.”