Interest Only Mortgages Fsa Makes Move To Protect Homeowners

Interest Only Mortgages Fsa Makes Move To Protect Homeowners



Interest Only Mortgages – FSA Makes Move to​ Protect Homeowners
Abbey recently stated that over 25% of​ homeowners decide to​ take out an​ interest-only mortgage .​
It's not hard to​ see why – the​ monthly payments are significantly less,​ just look at​ this example based on​ a​ 25 year £125,​000 mortgage at​ 5% .​
The interest only mortgage will cost £525 per month - but the​ repayment mortgage is​ £735 per month – an​ additional £210 a​ month – that's a​ lot of​ money!
At the​ root of​ the​ issue are the​ first time buyers – they simply can't afford the​ repayment mortgage,​ so take the​ interest only option as​ an​ easier way out .​
However,​ the​ interest only mortgage must be accompanied by a​ suitable savings vehicle to​ cover the​ outstanding capital at​ the​ end of​ the​ mortgage term,​ and it​ is​ this that many are failing to​ do – as​ many as​ 37% in​ fact .​
Now the​ Financial Services Authority (FSA) has stepped in,​ concerned that many homeowners will face a​ shortfall at​ the​ end of​ their mortgage term .​
It is​ now necessary for lenders to​ see firm evidence from new borrowers that they have set up a​ savings vehicle to​ cover the​ capital .​
Previously,​ borrowers just had to​ state their intention,​ for example,​ they would sell the​ property to​ raise the​ capital .​
However,​ that will no longer be good enough .​
The lender will need to​ see a​ proper plan set up – they are not allowed to​ set you​ up on​ an​ interest only mortgage without that proof .​
If they did,​ they would be going against regulations and would be penalised by the​ FSA .​
The lender will now need to​ see proof of​ a​ personal equity plan (PEP),​ an​ Individual Savings Account (ISA),​ or​ evidence that 25% tax-free cash from a​ personal pension plan (
In the​ short time that the​ new regulations have been in​ force,​ individual lenders are already making their own interpretations of​ the​ rules .​
The Nationwide Building Society is​ not allowing borrowers to​ use a​ future inheritance,​ or​ future pay rises as​ a​ basis on​ which to​ set up an​ interest only mortgage .​
Similarly,​ expected bonuses will not be good enough either,​ not unless you​ can prove that you​ will definitely be receiving them .​
Bonuses based on​ performance can't be guaranteed,​ so would not count .​
People that already have their own home will not be subjected to​ the​ same rigorous checks however .​
As long as​ you​ are borrowing less than two thirds of​ the​ new property's value,​ and you​ have £150,​000 of​ net equity in​ your current home,​ then Nationwide will accept you​ as​ a​ customer .​
On the​ whole,​ mortgage advisers will not recommend interest only mortgages,​ agreeing that they represent too much risk .​
Repayment mortgages guarantee that all monies owed are paid at​ the​ end of​ the​ term,​ but a​ separate savings vehicle could fail to​ live up to​ expectations,​ and you​ could end up with a​ shortfall .​
Most mortgage advisers will recommend a​ repayment mortgage to​ bypass that risk .​
On the​ other hand,​ the​ interest only mortgage is​ a​ useful short term solution,​ and if​ you​ can assure your mortgage adviser that you​ intend to​ switch over to​ a​ repayment mortgage as​ soon as​ you​ can afford to,​ they may well support your decision .​
Even in​ this case however,​ you​ will still need to​ provide the​ same details as​ if​ you​ were intending to​ stick with it​ for the​ full term .​
You simply won't be able to​ get an​ interest only mortgage without providing the​ right paperwork .​
The best all round solution is​ to​ get an​ interest only mortgage that allows you​ to​ overpay .​
So if​ you​ find that you​ have some extra capital,​ you​ can put it​ onto your mortgage,​ and reduce the​ capital .​
These types of​ mortgage are widely available,​ and many allow you​ to​ repay 10% or​ more in​ a​ single year .​
Of course,​ if​ you​ can't afford it,​ then you​ don't have to​ – at​ least you​ have the​ choice .​
Just make sure,​ before signing up,​ that you​ can overpay without penalty.




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