The FSA has warned of the potential dangers for a “significant minority” of people taking out interest-only mortgages without robust repayment strategies in place.
The note of caution follows research by the regulator to test how borrowers who have taken out such a mortgage intend to repay it and the extent to which these consumers understand the risks involved.
The FSA found that although consumer understanding of the product and the risks is high, 10 per cent of consumers taking out an interest-only mortgage have no idea or only a rough idea of how they will repay the loan.
A further 5 per cent say they have a definite repayment vehicle in place but the FSA challenges how robust these plans are, for example, leaving it close to retirement to switch to a repayment mortgage or those with limited equity planning to sell their home.
The FSA will report on its work on the quality of advice process within mortgage firms in January.
Managing director of retail markets Clive Briault says: “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.
“It is important that firms provide suitable advice to consumers considering taking out interest-only mortgages and that they consider affordability carefully.”