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Back-up plan for interest-only loans

The FSA is getting animated about the lack of repayment vehicles backing up interestonly mortgages.

This is not, of course, a new phenomenon. Everyone has a tale of woe from down the years of cashed-in endowments that were meant to back a mortgage not being replaced or some clever wheeze like a pension mortgage gone awry.

But the FSA, albeit within the limits of what it can find out, says that 24 per cent of all mortgages in 2005 were interest-only and as many as three-quarters were not backed with an investment. This suggests that 19 per of mortgages taken out in 2005 did not have a repayment vehicle in place.

For 2006, perhaps because the regulator has already expressed concerns about the issue, the figures may be lower.

But it could still mean, applying 2005’s percentages to the estimated lending for 2006, that around £65bn worth of borrowing is not being paid off properly, that is, with the happy result that the borrower has paid for their home at the end of the term of the loan.

It is uncertain, without looking at individual cases, what sort of advice may have been given and whether the IFAs or brokers are remiss or the clients simply putting the matter off for a rainy day.

There may be a need for advisers to be proactive in reminding clients that they need to start saving or that rainy day could see quite a few people having paid of the interest they owe but still not owning their flat or house and potentially getting very wet.

But the links between advisers and brokers and their clients are probably an asset in this situation provided that the FSA sees it that way.

But this a mortgage and housing market timebomb? Probably not as there is time for something to be done.

But the industry needs to get moving as there is a high risk of consumer detriment. There also needs to be an acceptance that, provided the issue is explained to clients, there should be a little bit of borrower beware applied to the issue. Unfortunately, that has not until now been the FSA’s style.

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