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Last Updated: Wednesday, 13 December 2006, 13:17 GMT
Interest-only mortgages warning
FSA headquarters
Be careful with interest only mortgages says the FSA
A significant minority of people with interest-only mortgages do not have "robust plans" to repay them, warns the Financial Services Authority (FSA).

Its report scrutinised the plans of 857 people who had taken out these mortgages and found that 15% had weak or non-existent repayment strategies.

About 24% of all new mortgages are lent on an interest-only basis.

The FSA warned lenders to be very careful when deciding which customers should be granted these mortgages.

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

"However, consumers must be very clear about how they are going to repay the loans they take out."

One in five people questioned by the FSA said they would struggle with other financial commitments if interest rates rose by just 1% above the current level of 5%.

No idea

One in 10 of the customers questioned by the financial regulator said they had either no idea at all how they were going to repay the loan they had taken out, or had only a rough idea.

A further 5% claimed to have a definite repayment plan in mind which, in the FSA's view, was weak.

When they were probed further by the FSA's researchers some were found to be relying on changing to a repayment mortgage when they were close to retirement, or planning to sell their home to pay off the debt.

The FSA pointed out that poorer customers were more likely to have no plans for eventual repayment.

"Consumers' repayment plans need to be realistic and robust," said Mr Briault.

"Consumers should not, for example, assume that house prices will continue to rise at the rate seen in recent years."

One reason for the popularity of interest-only deals is that they are the only way some people have been able to get on the housing ladder at a time of rapidly rising house prices.

They work by allowing the borrowers to pay off just the interest on the loan - but leave it up to them to come up with a way of repaying the loan sometime in the future.

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