It isn’t rocket science….

So spoke Martin Wheatley, currently managing director of the FSA (Financial Services Authority) and chief executive designate of the FCA (Financial Conduct Authority). This was a comment he made as part of an interview (one of several that he has given over the past few days) about a report published by the FSA that revealed that many people who took out interest-only mortgages may never be able to repay them.  The report by the FSA following an in-depth 3 year investigation of the whole mortgage market has revealed that up to one-in-three borrowers have ‘no reported repayment strategy’.  What exactly does this mean?

Let’s go back a little in history to the time when we as a country were in the midst of a credit binge.  Millions of people were approved loans that quite frankly, should never have been given.  To many, interest-only mortgages were the only way to take that first step onto the property ladder. With home-owners only having to repay the interest on the money borrowed as opposed to the actual loan, it seemed a cheap way of owning a property.  In theory, very true; in reality, many people borrowed far more than they could ever have hope of repaying.  The catch with an interest-only mortgage is that if you borrowed £125,000, you still owe £125,000 at the end of the mortgage term.  With the value of property falling in recent years, many people find themselves in negative equity – the size of their mortgage is larger than the value of their home.  Ironically, through borrowing and being allowed to borrow more than they could repay these first time ‘owners’ will never own their own home.

The nuclear fall out of the credit binge and subsequent credit crunch and accompanying recession led to reports such as the one conducted by the FSA.  The FSA itself is being split into two: one part being the Prudential Regulation Authority (it will deal with the operation of the financial system through regulation of all deposit-taking institutions) and the more publicly-minded Financial Conduct Authority that will deal with the regulation of the conduct of the retail element of the financial markets.  In layman’s terms it will regulate how financial products – such as mortgages –  are sold.  Very good, you may say, the greedy banks are finally having to get their houses in order.  Without a doubt this is true and much needed and over-due.  However, one should never forget that the ultimate responsibility for repaying a mortgage or the capital at the end of a loan term lies with the borrower, not the lender.  If you cannot afford to make the repayments, do not take out the loan, however much you want that property.  The FSA report announces that there will be strict new lending rules. Potential purchasers will only be able to take out an interest- only loan if they have an obvious way of making repayment  – and more importantly – can prove this to the bank. The reckless behaviour of the banks in recent years has created the nightmare situation that many people now find themselves in, but some responsibility has to be taken by the customer who chose to borrow the money in the first place.

It may well prove in the future more difficult to obtain a mortgage; but if you cannot prove that you have the means to meet your repayments, then you should not be attempting to kid yourself or the mortgage provider.  As Mr Wheatley said, “It isn’t rocket science”.