The Financial Conduct Authority (FCA) plans to introduce a "robust underwriting assessment" to be performed by lenders before issuing interest-only mortgages, letters published today have revealed.
The regulator, which will take over the regulation of consumer credit next April, will toughen up the rules for credit lenders, particularly those issuing interest-only mortgages, Martin Wheatley, chief executive of the FCA wrote in a letter to chairman of the treasury committee Andrew Tyrie, published today.
Responding to Tyrie's query of whether the FCA proposed to make customers responsible for informing themselves about the product they bought, Wheatley said the regulator needed to find a balance between regulating complex products and giving people the freedom of choice.
He wrote: "The FCA must make delicate judgements between consumer and firm responsibility, and these judgements will vary according to the risk profile of the product in question.
"Customers benefit from the availability of a wide range of mortgage products and the FCA should not, and does not, attempt to eliminate all risk from financial decision making.
"We believe that interest-only mortgages have a place within the future mortgage market, but that customers should have a clearly understood and credible repayment strategy in place to repay their loans at the end of term.
"This is why our new rules, which come into force in April 2014, will require lenders to undertake a robust underwriting assessment to confirm that interest-only customers have such a strategy in place."
The FCA's thematic review into interest-only mortgages earlier this year found that 2.5% of buyers were not aware they needed a repayment plan when taking out the mortgage, and did not have one in place as yet.
This could have bad consequences at the time the mortgage expires, with consumers finding themselves having to sell their houses to repay the rest of their mortgage, Wheatley warned.
He added that the issue was spread across most demographics, regions and institutions, but said that the final peak of loan maturity - in 2032 - will result from mortgages taken out between 2005 and 2008 and those converted to interest-only at some stage - most likely during the recession.
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