Interest only mortgages – FSA introduces new regulations

First time buyers often choose the interest only mortgage, attracted to the lower monthly payments. However, as this article explains, the FSA has changed the regulations.

Author: Anna Richardson

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Life Insurance News

First time buyers are finding it tough enough to get on the property ladder as it is, so it's quite understandable that they should choose to take the option with the lower payments. However, a large proportion are not making enough provision for the time when they have to pay the capital off at the end of the mortgage term. In fact, 37% are failing to save enough money.

For this reason, the Financial Services Authority (FSA) has decided to step in and change the regulations. They now ask lenders to request firm evidence from new borrowers that they are saving a sufficient amount to cover the capital. Borrowers used to be able to say that they'd sell the property to raise the capital, but that will no longer be allowed. From now on, if an interest-only mortgage is sold and the application does not provide details of a savings vehicle to cover the capital – the mortgage will be judged as being mis-sold. The lender would then be in trouble with the FSA for breaking regulations.

So what does the lender now need to see? They will expect to see either a personal equity plan (PEP) or an Individual Savings Account (ISA). You would also be able to use the 25% tax-free cash from a personal pension plan (PPP) to cover the capital. However, your savings vehicle will have to be in place and you must be able to provide proof of that – simply saying that you're going to do it will not be good enough!

Did you Know?
Early methods of transferring or distributing insurance risk were practiced by Chinese and Babylonian traders as long ago as the 2 nd and 3rd millennia BC. Chinese merchants traveling treacherous rivers would redistribute their stock across many boats to limit the loss due to any single boat sinking. The Babylonians devised a system which was recorded in the Code of Hammurabi, circa 1750 BC and was used by early Mediterranean sea traders. If a trader received a loan to fund his shipment, he paid the lender an extra sum in exchange for a guarantee that the lender would cancel the loan should the shipment be accidentally destroyed or stolen.

Did you know?
A survey of borrowers conducted by the Daily Mail found that 54% of applicants for loans were refused whilst 43% were offered a loan but at a higher rate than that advertised.

Did you know?
A survey conducted by Experian the credit reference agency, found that 54% of loan applicants for were refused whilst 43% were offered a loan but at a higher rate than that advertised. That's why, if you're searching for cheap loans , it's usually best to go through a loan broker who will know the lenders who will suit your circumstances.