Consumers taking out interest-only mortgages in the main have a reasonable understanding of the risks involved but a minority of borrowers do not have robust repayment strategies in place, according to a report published by the Financial Services Authority.
A study published this morning by the FSA and produced by IFF Research - entitled Interest-only mortgages: consumer risks - indicates 24% of new mortgages are taken out on an interest-only basis but only a very small number of people just 13% of those questioned – do not have any savings vehicle in place to repay the loan, albeit some have an idea of how they intend to do so.
More importantly, 92% of those questioned say they understand what is meant by an interest-only mortgage and had a reasonable understanding of the risks associated with such a mortgage.
And 84% of those questioned claim to have been given advice in the course of choosing their mortgage, whereas product sales data gathered by the FSA suggests just 70% of the interest-only market is on an advised-sale basis.
Almost all first-time buyers in the study (96%) also said they purchased their interest-only mortgage through an intermediary compared with 70% across the entire study.
IFF research was conducted by phone poll with 857 borrowers who had taken out an interest-only mortgage prior to the study, and they were then placed in groups 1, 2, 3 or 4 depending on the repayment vehicle they have in place and their plans to repay the loan.
Evidence revealed almost two-thirds (65%) of people fell into the group of people (Group 2) who have no recognised repayment vehicle but have other savings, investment plans or strategies in place while a further 22% fell into Group 1, as they claim have an Isa, endowment or pension fund to repay the loan.
That said, around 40% of those in group 2 - who are repayment strategies in place but no recognised vehicle - also say they intend to repay the loan through the sale of a property but a further 16% plan to switch into a repayment mortgage at a later date.
More than nine out of 10 borrowers (92%) who plan to use savings and investments to repay the capital also say they are fully aware of the need to monitor their investments to ensure those investments will reach the capital loans repayment.
Research in the report tested how borrowers, who had recently taken out an interest-only mortgage, planned to repay the loan and the extent to which those consumers understood the risks associated with this type of borrowing. 24% of new mortgages are taken out on an interest-only basis.
At the same time, however, the FSA in some part challenges the belief consumers may know what they are doing by arguing 5% say they have a definite repayment strategy but evidence indicates borrowers are leaving it close to retirement before switching into a repayment mortgage while others are relying on the limited equity of selling their homes to repay the capital borrowing.
Additional analysis of the advice given reveals 37% of those advised made their mortgage selection based on the recommendation of “a professional” and a further 25% were “influenced by a professional” while 31% said it was “my choice entirely” and 6% said the decision was influenced “by someone else”.
Commenting on the research, Clive Briault, Managing Director of Retail Markets at the FSA, 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.
“The research showed that cost is an important factor for many borrowers when deciding whether to take out an interest-only mortgage and that a higher percentage of lower income consumers were in the category that had no firm plans for repaying the loan.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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