MMR: Interest-only applications must be assessed on capital basis

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An interest-only mortgage application should be assessed as though it is a capital-and-interest deal, unless there is a "believable" strategy for repaying the loan that does not rely on house price inflation, the Financial Services Authority (FSA) has said.

In the regulator's final consultation paper on the Mortgage Market Review (MMR), it said lenders should assess affordability on a capital and interest basis, but where a consumer has a credible strategy to repay the capital at the end of the term, affordability may be assessed on an interest-only basis. In this instance, the lender will need to obtain information on the actual cost of the repayment strategy and not an estimated cost. The FSA CP11/31 cost and benefit analysis showed that in Q3 2011, 78% of all interest-only mortgages had no reported repayment vehicle in place. The F...

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