The emerging scandal of interest-only mortgages

The FSA have put them at the top of their table of "emerging retail risks" and now several mortgage experts have begun echoing their anxieties. Interest- only mortgages may well prove to be the next mis-selling scandal to taint the mortgage industry. Last year, 200,000 homebuyers took out the specialist mortgage without putting a repayment vehicle for the lump sum in place, of whom 60,900 were first-time buyers, says the Council of Mortgage Lenders. And that figure is up, accounting for 25% of first-time buyer mortgages in 2005, compared with 15% in 2004. The dangers of such a strategy are obvious. "If borrowers have not set up a way of repaying the mortgage, they could lose their property," says The Independent's Stephen Pritchard.

The attractions are understandable. Figures compiled by Britannia Building society show that a £150,000 mortgage costs the borrower £863 a month over the first two years, against £605 on its interest-only equivalent. But there are worries that some lenders are not properly informing people of the risks involved in taking interest-only.

Glen Morris of mortgage broker Berkeley Consultants tells The Guardian: "Some of the big lenders are prepared to offer interest-only mortgages to people we would not consider suitable, based on nothing more than the completion of an application form." Because of the "laissez-faire attitude of many lenders we'll see a growing number of defaulting borrowers and a corresponding increase in repossessions," the paper quotes one industry insider as saying.

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The only thing to be said for them is that they can get many people on the property ladder, or allow them time to put their finances in order.

However, "if you are stretching so much that you have no option but interest-only, you should probably consider waiting until your finances are a little stronger before buying or moving," says Moneysupermarket. com's mortgage expert, Louise Cuming, in The Mail on Sunday