The recent report from the Financial Services Association (published 13.07.10) made the point that the share of interest only mortgages has been increasing.

It said that at the peak of the market, over 30% of all mortgages taken out were interest only.

And what worries the Financial Services Association, is that many people taking out interest only mortgages do not have a suitable financial vehicle to pay them off once they are due. A large number of people rely on house inflation, or other plans (such as a windfall, or hoped for inheritance) to see them through at the end of the mortgage term.

These findings were part of a larger report which made a number of observations. Most worryingly was that nearly half of all households with a mortgage had either no money left, or indeed had a shortfall, every month after the payment of the mortgage and living costs.

This has encouraged the Financial Services Association to enforce lenders to ensure that people can actually afford the mortgage they are thinking of signing-up, has signalled the virtual ending of the self-cert mortgage (where people verify their own income) and told financial institutions to be more aware of possible problems with their borrowers should they start falling behind on payments. It stated that those borrowers with a damaged credit history were very vulnerable.

As for arrears charges for those that fall behind on their mortgage payments, the Financial Services Association conducted a review, as part of their report, and discovered that there was a wide variation in penalty fees across the market.

The Financial Services Association reminded lenders that mortgage rules exist which state that arrears charges should be based on reasonable costs incurred by the lender as a result of their customers being behind, rather than linked to punishing penalty charges. In other words, the charges should mainly cover the administrative cost of being in arrears.

The Financial Services Association is asking the mortgage industry and consumers for further views on interest only mortgages and the state of the industry in general. Responses should be completed by 16 November, 2010.

Guest Article by Neil Camp

It’s quite appropriate that the Bank of England’s new way of trying to save the U.K. economy, quantitative easing, sounds like a brand of laxative.

The economy is literally bunged up and the Bank of England is hoping that an initial £75 billion will help matters, and if not, a further £75 billion will be made available.

So what is quantitative easing? It’s not quite a matter of simply printing new notes, as many critics are trying to suggest. That’s been recently tried in Zimbabwe and doesn’t work, causing rampant inflation. But the big problem for the U.K. is deflation, not inflation.

Quantitative easing is all about flushing vast amounts of money into the system.

Now, a few basics. The Bank of England controls the flow of money into the U.K. economy. It effectively sells money to the country’s financial institutions at a given rate: the interest rate. By repeatedly lowering the interest rate – at the time of writing it’s 0.5% – it has tried, and failed, to get the banks to pass cheap money onto its customers, both personal and business.

So, the main problem is the lack of credit. This is desperately needed by companies to fund their businesses and people to fund their daily lives, and the reduction of interest rates have not relaxed the credit supply log jam.

But quantitative easing is not about giving money away for free at the ATMs. The new money is effectively swapped for assets, both good and bad, which are handed to the Bank of England by the financial institutions in exchange for the bundles of cash.

Now, the great fear is that the banks will gladly hand over assets, a number of them toxic, in return for the cash which they will then use to rebuild their balance sheets. So, what you might find is that having received £75 billion, the banks are solvent again, but their customers are still starved of credit.

Furthermore, quantitative easing doesn’t have a great reputation, with the Japanese having used it to little effect in the 1990s. But, experts put that down to the Japanese using the tactic too late, a case of trying to shut the door long after the horse has bolted. It led to what the Japanese called a lost decade, as it struggled to cope with deflation.

So, the Bank of England has struck quickly, playing what pundits see to be the last card in the pack. If it works, it will stimulate the dying economy. It if doesn’t, it will have wasted billions of money which could have been used elsewhere. And it might cause sudden and rampant inflation from which it will take generations to recover.

But what might turn out to be the biggest criticism is why the Bank of England, and behind them the Government, doesn’t make the money available through a financial institution that will guarantee it goes to the right people.

The Government controls Northern Rock and, in effect, HBOS, so why cannot they be given the money and ordered to distribute it via loans and credit.

Cynics might say that Bank of England is stuffed full of bankers whose primary concern is to help other bankers, despite what the Governor might claim. Others might say that the Government cannot favour one institution over another and that legal claims from those left out of the bonanza might follow.

One thing is for sure though, if it doesn’t work, we may all have to await financial Armageddon.

Guest Article by Neil Camp