Mortgages. A repayment vehicle should be in place for an interest only mortgage.

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homes with an interest-only mortgage. The reason is clear - their monthly payments are much less. For example, a £150,000 interest only mortgage at an interest rate of 5% and ( cheap home insurance ) repayable in 25 years time, costs £625 per month - but on a repayment basis the same financing costs £875 per month.

These cash flow savings have understandably proved highly popular with first time buyers getting their feet on the property ladder and others working on a tight budget. The problem is that some 37% of homeowners with interest only mortgages are not saving any money towards repaying the capital when the mortgage eventually comes to the end of its term.

The Financial Services Authority (FSA) has not ignored this problem. Last year they ushered in new rules requiring lenders to seek evidence from new borrowers about how they intend to repay the capital in the future. If the borrower says they'll repay by selling the property, that ( cheap car insurance ) simply won't be sufficient. The FSA is likely to judge as miss-sold, any new mortgage that is granted without details of a verified repayment vehicle to generate a sum large enough to repay the mortgage. And, if the figures don't stack up, the lender will get into deep water with the FSA.

The sort of repayment vehicle they will be looking for will be an Individual Savings Account (ISA) or an existing personal equity plan (PEP). Even the 25% tax-free cash from a ( life insurance quotations ) personal pension plan (PPP) will do. But you'll have to provide documentary evidence to the lender that these financial arrangements are in place - just saying you will do it sometime in the future won't wash.

From reactions so far, it's quite clear that individual lenders will interpret the FSA's rules in different ways. Take the Nationwide Building Society for example: their new rules say that you can't qualify for an interest only mortgage if you plan to repay using future pay ( medical insurance ) rises or an inheritance. Even if you claim you'll fund an ISA from bonuses rather than from regular income, you'll be required to prove that such a bonus scheme exists and that the level of bonus relied upon is realistic. However, the Nationwide are prepared to provide an interest only mortgage if you are not a first time buyer, have at least £150,000 of net equity in your existing property and the mortgage you want is less than two thirds of the new property's value.

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Statutory Wealth Warning:
Your home may be repossessed if you do not keep up your repayments on a mortgage or any debt secured on it.