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FSA make move to protect homeowners
The interest only mortgage provides the perfect solution for cash-strapped first time buyers - but concerned about future shortfalls, the FSA has stepped in and changed the regulations.
Author: Anna Richardson
- Home Mortgage Loans
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- Mortgages. Exit fees to be capped.
- After years of lenders having a free hand to increase exit charges, the FSA steps in to restore fairness for consumers. This article explains.
- Mortgages. The pitfall of Interest Only mortgages.
- Interest Only mortgages have become increasingly popular. Why, and what are the concerns?
- Mortgages. The return of the Mega-Mortgage.
- All of a sudden, mortgage lenders love mortgages over £500,000. Great if you can afford them.
Abbey recently stated that over 25% of homeowners decide to take out an ( insurance ) interest-only mortgage. It's not hard to see why - the monthly payments are significantly less, just look at this example based on a 25 year £125,000 mortgage at 5%. The interest only mortgage will cost £525 per month - but the repayment mortgage is £735 per month - an additional £210 a month - that's a lot of money!
At the root of the issue are the first time buyers - they simply can't afford the repayment mortgage, so take the interest only option as an easier way out. However, the interest only mortgage must be ( mortgage quotations ) accompanied by a suitable savings vehicle to cover the outstanding capital at the end of the mortgage term, and it is this that many are failing to do - as many as 37% in fact.
Now the Financial Services Authority (FSA) has stepped in, concerned that many homeowners will face a shortfall at the end of their mortgage term. It is now necessary for lenders to see firm evidence from new borrowers that they have set up a savings vehicle to cover the capital. Previously, ( online car insurance ) borrowers just had to state their intention, for example, they would sell the property to raise the capital. However, that will no longer be good enough. The lender will need to see a proper plan set up - they are not allowed to set you up on an interest only mortgage without that proof. If they did, they would be going against regulations and would be penalised by the FSA.
The lender will now need to see proof of a personal equity plan (PEP), an Individual Savings ( car insurance policy ) Account (ISA), or evidence that 25% tax-free cash from a personal pension plan (PPP) will ultimately cover the outstanding capital. It will no longer be good enough to say that you will set it up - you must show that you have already sorted it out!
Your home may be repossessed if you do not keep up your repayments on a mortgage or any debt secured on it. Security by way of a charge on your home may be required.