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FCA Accused Of Interest-Only Mortgage ScaremongeringThe Financial Conduct Authority (FCA) has been accused of scaremongering when it comes to dealing with outstanding interest only mortgages.

You may remember that Spotlight reported that the FCA warned that almost half the 2.6 million or so UK property owners that have interest only mortgages would not have savings or other funds to cover the final bill at the end of the tenure.

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Interest only mortgages represent approximately 33% of all UK mortgages.

With Interest only mortgage holders only paying enough to cover the monthly mortgage interest on the amount borrowed, the average shortfall is £71,000 (GBP) per person, according to the published FCA research.

The FCA, the new watchdog for the sector taking over from the Financial Services Authority (FSA), commissioned the research to provide a clear indication of what mortgage borrowers could face when their Interest Only mortgages mature between now and 2041.

Property investors and Buy-To-Let landlords are still wise to select interest only mortgages, rather than waste money by opting for capital repayment mortgages from the outset.

Landlords choose interest only mortgages to purchase rental properties because they are the cheapest option and may choose to switch to a repayment option at any time once the rental income is coming in.

Peter Williams, Executive Director of the Intermediary Mortgage Lenders Association (IMLA),said: “By confirming that nine in every ten interest only (IO) borrowers have a repayment strategy in place, the FCA’s research should put an end to misguided reports of a mis-selling ‘scandal’ when the market boomed between 2002 and 2007. Having said that, as both the Experian report for the FCA and the GfK report shows, there are issues for the industry to deal with.” 

Market research firm GfK NOP questioned 1,103 interest only borrowers to consider how prepared they were to repay their loans.

The study found that 37% of interest only mortgage holders faced a shortfall in their plans to pay back the lump sum of the home loan, based on their own calculations.

But the FCA believes that many people underestimated the financial problem and it believes 48% of interest only mortgage holders will face a shortfall.

Martin Wheatley, Chief Executive of the FCA, said: “My advice to borrowers is not to bury their head in the sand over interest only mortgages. This report is a call to action.”

The Bank of England (BoE) have warned that in future getting a mortgage might be tougher than you think.

The BoE stated that tightened qualifications, set by a wide range of lenders, could see the credit rating of expectant borrowers fall beneath the banks’ accepted level for mortgages.

The Credit Conditions Survey, published quarterly, found that UK mortgage lending has shown signs of improvement in early 2012 but residential property buyers face a tough three months until summer.

 Most lenders expect the upward pressure on mortgage interest rates to be maintained and anticipate reducing the availability of mortgages in the next three months.

With little prospect of a material loosening in credit conditions on the cards, and housing market demand likely to remain weak, the downwards pressure on house prices is set to be maintained this year. 

Would be mortgage borrowers need to be prepared for the stricter criteria being demanded by mainstream lenders, meaning more difficulty in securing a mortgage.

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