John Charcol comments on FSA report on interest only mortgages

Ray Boulger, senior technical manager at John Charcol, comments on report by the FSA on interest only mortgages:

“It is very encouraging to see today’s FSA report on interest only mortgages taking such a common sense approach. Basically it recognises that interest only mortgages have a legitimate place in the market but stresses the importance of borrowers with this type of mortgage having a robust repayment plan and not relying on something unquantifiable such as house prices continuing to increase rapidly.

“Primarily because of concern over the FSA’s attitude to interest only mortgages prior to today’s report, most lenders as a matter of course recommend in their mortgage offers for an interest only mortgage that the borrower should take out a separate repayment vehicle. However, what the repayment vehicle should be, or even an example of what it could be, is not normally specified. Most people would consider a repayment vehicle to be either an endowment policy or an ISA, and perhaps also a unit trust savings plan, i.e. a regular monthly investment into a risk based investment product. Following the recent issues with endowment mortgages a large majority of borrowers now prefer to avoid the higher risk routes to repaying a mortgage.

“This begs the question of exactly what repayment vehicle do lenders have in mind when they recommend that borrowers should have a repayment vehicle. Today’s FSA report should encourage lenders and brokers to reconsider this type of generic advice and instead of recommending what they think the regulator wants to hear make a more realistic recommendation.

“The bottom line is that all borrowers with an interest only mortgage must have a repayment plan, which could include a repayment vehicle but often won’t, although many will have an existing endowment policy and/or PEP/ISA to repay part of the mortgage. However, any repayment plan which does not involve a regular monthly payment by direct debit or standing order requires discipline, which will be a challenge for some borrowers. For these borrowers an interest only mortgage may be dangerous. It is very easy to persuade oneself that putting off repaying a mortgage is OK when there are always so many other demands on one’s money. Thus it is important to be realistic about the mortgage repayment plan, both in respect of the method and the timing.”