The Financial Services Authority (FSA) has given interest only mortgage lenders an early Christmas present this year, by concluding that consumers who take out these products generally have a reasonable understanding of the risks involved.
Given the level of indebtedness of the average British household, I wonder how realistic this view really is?
However, the FSA attempted to show some muscle by noting (or rather expressing a wish) that lenders should continue to develop and implement best practice strategies to ensure customers are sold the mortgage that is best for them, and that they remain aware of the risks.
Just like they did with endowment mortgages?
Interest only mortgages are now very popular in the UK. This is mainly due to the fact that people want to avoid paying off their debts, and that the housing market is now at an all time high.
By the end of Q2 2006 interest only mortgages accounted for 25% of the total mortgage market.
Unfortunately many borrowers take them out without specifying a repayment vehicle, the lenders choose to remain in blissful ignorance as to how the debt will be rapid.
Given that the average mortgage is for 25-30 years or more, many lenders will be secure in the knowledge that if disaster strikes at some unspecified date in the future, they won't be around to pick up the pieces.
The FSA last year put interest only mortgages at the top of its list of "emerging retail risks." However, its latest announcement indicates that it has backtracked.
That being said, the FSA note that 10% of consumers taking out interest only mortgages have either no idea or at best only a rough idea of how they plan to repay the loan they have taken out.
I believe that this is a recipe for disaster, akin to the endowment mis-selling scandal.