Summary

Interest only mortgages have been very popular, especially amongst first time buyers. But the FSA has now introduced restrictions. This article explains.

Mortgages. Regulations tighten on interest only mortgages. Part 2

Author: Michael Challiner

Lots of mortgage advisers seem to agree that interest only mortgages

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Life Insurance News

should only be used as a last resort when income is tight. That's because whichever investment vehicle the borrower uses to repay the mortgage, the investment returns are never guaranteed and it could fail to deliver sufficient capital at the end of the term to fully repay the mortgage. This means there's an element of risk involved. Therefore, many advisers prefer to be sure and recommend a repayment mortgage where there is absolutely no risk of a shortfall.(They may have in mind the desirability of avoiding any risk exposure within the advice they provide although this is covered by their professional indemnity insurance!)

Having said that, some advisers will acknowledge that an interest only mortgage can be useful if the borrower plans to simply shelter under the mortgage's lower repayments as a temporary stop gap of say four or five years, and then switch to a repayment mortgage. Of course, the FSA will still expect the borrower to provide evidence to the lender that a suitable investment or savings plan is in place prior to the borrower releasing the interest only mortgage.

However, in our view, if advisers do recommend an interest only mortgage, they should recommend a scheme where the borrower can make penalty free overpayments. With such mortgages, the borrower is only committed to paying the monthly interest, but as and when spare capital becomes available, money can be paid in to reduce the outstanding mortgage. There are plenty of mortgages available like this. Most allow the borrower to repay at least 10% of capital each year, penalty free, but please check the details before you sign up for the mortgage.

Did you Know?
The words term assurance are used by many people when what they really want is term insurance, more commonly known as life insurance.

There is no investment element within life insurance and so there's no payout if the policy reaches its termination date. A life insurance policy only pays out if the policyholder were to die (or become terminally ill and death is anticipated within 12 months of diagnosis - other conditions may apply), before the policy's termination date.

Did you Know?
When looking for a cheap mortgages you're sure to face the decision between choosing a low interest rate mortgage or a higher rate mortgage but with no, or very low, up front costs.

We've all seen mortgages with incredibly low interest rates advertised in the national press and on the Internet. Experience shows that it's a low interest rate that pulls in the borrowers so lenders bust a gut to publicise low headline rates. The difficulty is that these super low rates force the lenders to recover some of their profits in other ways. A high arrangement fee is a common solution.

An arrangement fee is charged to allegedly cover the cost of administering the mortgage application and reserving the advance. Normally these fees can be added to the mortgage but some lenders require them to be paid in advance. And they can vary enormously, not just between lenders but even between the mortgages offered by the same lender. So keep your eyes skinned!

Did you Know?
According to the Council of Mortgage Lenders, over 200,000 homebuyers in the London area took out an interest-only mortgage last year without having a repayment vehicle in place. Of these 60,900 were first-time buyers.

There are no figures available for the total number of homebuyers with interest-only mortgages. However, the market share for new interest-only mortgages have been running at between 10 to 20% over the past 10 years.

Mortgage brokers have been arranging more than half of these interest only best mortgages. So when these mortgages reach maturity, if the mortgage holder hasn't enough capital to repay the debt, many of these brokers could be up for claims of miss-selling.

Did you Know?
The concept of medical insurance was proposed in 1694 by Hugh Chamberlen. In the late 19th century, early medical insurance was actually disability insurance, in the sense that it only covered the cost of emergency care for injuries that could lead to disability. This insurance model continued until the early 20th century when patients were expected to pay all other health care costs out of their own pocket under what is known as the fee-for-service business model. Modern medical insurance programs emerged mostly after the 2 nd World War.

Today in the UK, most comprehensive private medical insurance programs cover the cost of routine and planned health care procedures, although emergency care is still largely the province of the National Health Service.