The regulator stressed that while there is a reasonable understanding among consumers of the risks associated with interest only mortgages, a ‘significant minority’ do not have a robust strategy in place to repay the loan.
Its study said 10 per cent of consumers had no idea or only a rough idea of how to finance the debt. Only 5 per cent had a definitive strategy in place, although the FSA challenged the strength of these plans on the grounds that some were waiting until retirement approaches to switch to a repayment mortgage while others said they would sell their home.
Clive Briault, managing director of retail markets at the FSA, said: “There is nothing wrong with interest only mortgages. However, consumers must be very clear about how they are going to repay the loans they take out.
“Consumers’ repayment plans need to be realistic and robust and should not assume that house prices will continue to rise at the rate seen in recent years. It is important that firms provide suitable advice to consumers considering taking out interest-only mortgages and that they consider affordability carefully.”
Rob Griffiths, associate director at the Association of Mortgage Intermediaries, said: “We are pleased to see consumers have a deep understanding of interest-only mortgage products and believe mortgage intermediaries fill a vital role in imparting this knowledge to clients. Interest-only mortgage products meet a clearly identifiable consumer need and continue to represent an affordable way for many to get on the housing ladder. We should remember that interest-only mortgage products are not just bought by one type of person with many different people using the product in different ways. Sophisticated consumers are increasingly taking out interest-only products and we are seeing a societal shift in the UK with many viewing their property as an asset like any other asset class.”
