Market Watch

Name: David Hollingworth

Company: L&C

C&G has come in for some stick over its decision not to automatically grant existing borrowers the ability to switch their repayment method from repayment to interest-only. Although it may initially appear that the lender is trying to curtail borrower options it strikes me that it is pretty sensible to question the motive of a borrower looking to take this course of action. By allowing the switch to take place, anyone struggling to meet their mortgage payments should have to enter into a more useful dialogue with the lender. That discussion may ultimately result in a period of switching to interest-only to ease their cash flow but it seems obvious that questions will be asked of a borrower stepping away from their established repayment plan. With house prices continuing to decline, halting the repayment of capital is not going to lead the borrower to an improved position.

Lenders can only really offer support if the borrower gets in touch as early as possible to discuss options open to them. If the first a lender knows about potential difficulty is that the account has fallen into arrears then there is a fair chance that the situation has progressed to a point that will be difficult to pull back. The better course of action is for borrower and lender to work together.

However, although mortgage availability remains tight there will be many that feel let down by a failure to pass on rate cuts to existing borrowers, especially those Northern Rock borrowers that have nowhere else to go and are reliant on the nationalised bank's decision. nName: Fahim AntoniadesCompany: Quantum Mortgages

The first ramification of this decision is the financial problem it causes to the borrower: needless to say, the difference between the monthly payments on an interest-only mortgage and a repayment one can be the difference between the homeowner being able to afford the payments - thus keeping their home - and facing repossession and eviction. This is the very thing the Government is trying to prevent. The second issue is the financial problem it could cause to C&G itself; it is likely that as a result of such a decision they will be faced with more repossessions, thus adding to their financial burden of having to go through the courts. Does it really make long-term financial sense?

Finally, I suspect what has really been the underlying factor in this decision is the regulatory issue. If C&G is worried about the regulatory ramifications of changing a client's mortgage from repayment to interest-only where the client has no repayment vehicle in place, then I suggest they seek clarification from the FSA. Whilst this decision may be in keeping with the letter of the law, it certainly wouldn't be in keeping with the spirit of treating customers fairly - a consideration which seems to have been totally over-looked.

Section 14.1 of the Banking Code to which C&G subscribes says: "We will be sympathetic and positive when we consider any financial difficulties you may have..." The decision not to allow customers to switch to interest-only mortgages seems to suggest that, in C&G's view, this course of action does not play a part in being either sympathetic or positive. nName: Ray Boulger

Company: John Charcol

Existing C&G customers with their lending on a repayment basis can only switch their payment method to interest-only if their loan-to-value (LTV) is no more than 75%.

Most existing borrowers will only want to switch to interest-only if they have difficulty meeting their current payments and so for C&G to state that it will not allow this flies in the face of FSA guidance on dealing with customers in financial difficulty and also falls foul of the high-level principle of treating customers fairly.

I have spoken to C&G about this apparent breach of FSA rules and it readily conceded that if customers are in financial difficulty allowing them to switch to interest-only would be considered.

Other options of course would also need to be considered, such as extending the term, but options here may be limited by the borrower's age.

In practice, C&G's position is that it will have a conversation with borrowers before allowing a switch to interest-only, but it will still be an option.

Apart from a chance of tone, nothing much has really changed then. Even before this 'policy change', C&G would have had an opportunity to have a conversation with its customers, as such changes always had to be requested.

This episode suggests to me that this 'policy change' was announced to brokers without adequate consideration of the consequences. It also suggests that C&G may not yet fully recognise the price of taking Darling's shilling! n