How will your mortgage be repaid?

Article posted on 13 November 2012

The Financial Services Authority’s (FSA’s) review of the mortgage market has raised some awkward questions.

The FSA issued a paper last month in which it set out new rules for the mortgage market. These rules, according to the FSA, ‘will prevent future borrowers ending up with a mortgage they cannot afford’. One of the FSA’s key areas of concern was interest-only mortgages, which have largely disappeared from today’s home loan marketplace.

The FSA says that around 41% of all existing loans secured on homes are on an interest-only basis, including 34% of regulated (home purchase) mortgage balances. Of these, a little over three quarters have ‘no reported repayment strategy’. Research published by the FSA suggests that over a quarter of interest only mortgagors were relying on the sale of the property to repay the loan. That is a strategy which generally relies on house prices rising.  Nationwide’s latest figures underline the danger of that approach: the average UK price in the third quarter of 2012 was £163,910, 10.4% less than five years’ earlier.

If you have an interest-only mortgage and no current method of repayment, the sooner you start planning for (not just hoping for) one, the better.

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