Findings from a report by the UK Financial Services Authority have indicated that, while the majority of interest-only mortgage customers take into account the risks involved in purchasing this product, a minority do not have a robust repayment strategy.
With 24% of new mortgages being taken out on an interest-only basis, the Financial Services Authority (FSA) has examined the extent to which consumers understood the risks associated with this type of borrowing and how they were planning on repaying the loan.
The research discovered that consumer understanding of the interest-only mortgage product was high and understanding of the risks associated with it generally good. However, 10% of consumers taking out interest-only mortgages have either no idea or at best only a rough idea of how they plan to repay the loan they have taken out.
There is nothing wrong with interest-only mortgages. However, consumers must be very clear about how they are going to repay the loans they take out. Consumers’ repayment plans need to be realistic and robust. Consumers should not, for example, assume that house prices will continue to rise at the rate seen in recent years, commented Clive Briault, managing director of retail markets at the FSA. It is important that firms provide suitable advice to consumers considering taking out interest-only mortgages and that they consider affordability carefully.