Interest-only mortgages need repayment plans

Anyone taking out an interest-only mortgage should have a "realistic and robust repayment plan", a government watchdog has said today.

However a "significant minority" of borrowers taking out interest-only mortgage do not have a plan in place to pay off their loan, the Financial Services Authority (FSA) reveals in a report today.

"There is nothing wrong with interest-only mortgages," said FSA managing director Clive Briault.

"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."

FSA research examined the plans borrowers who had recently taken out interest-only mortgages had to repay the original loan and how well consumers understood the risks that come with this type of borrowing.

The report reveals consumers generally have a high understanding of interest-only mortgages, including the risks associated with them.

But ten per cent of those taking out interest-only mortgages have at best a rough idea of how they will repay the loan they have taken out.

Another five per cent claim to have a good plan on how to repay their loan, but the FSA questions how strong these plans are.

For example, borrowers plan to wait until they are close to retirement to move to a repayment mortgage while others plan to sell their home, ignoring the fact the home might lose value and may not cover the cost of the loan.

Currently 24 per cent of new mortgages are taken out on an interest-only basis.