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Page last updated at 07:44 GMT, Wednesday, 1 June 2011 08:44 UK

Interest-only mortgages 'deluded'

Interest-only mortgages may seem like a good option for homeowners who are having trouble keeping up with their payments.

But the Financial Services Authority has threatened to "constrain future interest-only lending" over concerns that home owners will suffer if interest rates rise.

Terry Smith of the a fund management company Fundsmith said that people are "deluding themselves" with interest-only mortgages, thinking that they own their house while in effect only renting it.

"You're not really buying [the house], but you have the risks if the value goes down," he added.

Deanne Julius, a former member of the Bank of England's Monetary Policy Committee, explained that there is no risk-free solution, as rents and flexible mortgages also go up.

Interest-only mortgages "are the right thing for certain people at certain times of their life" she told John Humphrys.

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