This does not include the assumption that house prices will rise.
Of all the three key affordability proposals laid out by the FSA, it said it expected the interest-only proposals to have the biggest impact on the market today.
The FSA’s cost-benefit analysis indicates that in today’s subdued conditions, the proposals would have a significant impact on 2.8% of self-employed and 9.6% of credit impaired borrowers.
This reflected the fact that these groups included large proportions of interest-only borrowers.
For first-time buyers by contrast, who tend not to take out interest-only mortgages, the impact is more limited with only 0.4% of the first-time buyer population affected.
The responsibility for the affordability assessment of interest-only mortgages will fall on the lender.
The consultation paper recognised that interest-only mortgages served a purpose to a wide variety of customers but that it should only be considered in limited circumstances and considered a “niche” product.
Examples of credible strategies for repaying an interest-only mortgage included where there was a defined repayment from investment; where down-sizing is a credible option; and where the mortgage is repaid on death.
However property price inflation or any other speculative source of capital repayment, for example an uncertain inheritance, would not be an acceptable repayment strategy.
Where there was an acceptable strategy, affordability could then be calculated on an interest-only basis – but the affordability assessment should also take into account, where appropriate, the cost of the repayment strategy.
Where this applies the lender will need to obtain information on the actual, current, cost of the repayment strategy and not simply estimate that cost.
Lenders must obtain evidence of the repayment strategy at the application stage, before they enter into an interest-only mortgage and check, so far as they reasonably can, that the repayment strategy is credible and has the potential to meet the final capital balance.
Lenders must keep a record setting out the reasons for its decision to lend on an interest-only basis.
The FSA is also proposing that lenders take reasonable steps to contact borrowers at least once during the mortgage term to check on the repayment strategy.
The report says: “Out of our three key affordability proposals, we would expect our interest-only proposals to have the biggest impact on the market today.
“This is because our data suggests that many borrowers do not have a capital repayment strategy in place and may have taken out an interest-only mortgage to stretch affordability and/or take out a bigger mortgage than they would otherwise have got.
“Those borrowers will have their ability to repay assessed on a capital and interest basis.”
