The Intermediary Mortgage Lenders Association (IMLA) has warned that interest-only mortgages will become effectively obsolete if the Financial Services Authority (FSA) proceeds with proposals in the Mortgage Market Review consultation paper.

IMLA warns that the implementation of the FSA’s draft proposals will result in lenders withdrawing from this important sector of the market.

In its response to the consultation, IMLA argues that the FSA could make simple rule changes that will preserve the ability of lenders to judge interest-only applications on their individual merits rather than be tied by inflexible rules.

IMLA believes that the introduction of an enhanced affordability test and a requirement to assess the borrower’s capacity to service a capital and interest-only loan is sufficient to ensure more robust interest-only lending decisions.

IMLA executive director Peter Williams says: ‘The FSA has set out to create a flexible market that works better for consumers. In IMLA’s view, its potential treatment of interest-only loans could achieve the very opposite, not least through the increased regulatory burdens and risks the regime will pose for lenders.

‘The FSA needs to find a balance in what it proposes so that lenders are still able to offer interest-only loans and thus meet a diverse range of customer needs.’