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.

Author: Michael Challiner

  (health insurance)

Understandably, this level of cash saving has proved highly popular with first time buyers struggling to get the feet on the property ladder and others working on a tight monthly budget. But theres a time bomb lurking. 37% of homeowners with interest only mortgages are failing to save any money for repaying the mortgage when the mortgage capital eventually becomes repayable at the end of the term.

The Financial Services Authority (FSA) is concerned about this problem so last year they ushered in new rules requiring lenders to seek evidence from new borrowers about the steps theyre taking to repay the capital. And it wont be sufficient for the borrower to say that they intend to repay the mortgage by selling the property. From now on, the FSA is likely to judge any new mortgage that is granted as being miss-sold unless the application includes details of a verifiable repayment vehicle which is likely to generate sufficient to repay the mortgage. And, if the figures dont stack up, the lender will be in hot water with the FSA.

The ideal type of repayment vehicle they will be looking for will be an existing personal equity plan (PEP) or an Individual Savings Account (ISA). Even the 25% tax-free cash from a personal pension plan (PPP) will be acceptable. But borrowers will have to provide evidence to the lender that these financial arrangements are in position - just saying you intend to do it wont wash! (life insurance)

From reactions so far, we can see that individual lenders are interpreting the FSAs rules in different ways. For example, take the Nationwide Building Society: their new rules say that you wont qualify for an interest only mortgage if you plan to repay using an inheritance or are relying on future pay rises. Even if you intend to fund your repayment investment from bonuses rather than from regular income, youll still be required to show that the bonus scheme exists and that the expected level of savings from bonuses are realistic.

However, the Nationwide Building Society will agree an interest only mortgage if you arent a first time buyer, the mortgage you want is less than two thirds of the new propertys value and you have at least £150,000 of net equity in your existing property.

Click here for part 2 (cheap car insurance)

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