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Borrowers with interest-only mortgages face a “ticking time-bomb” that could see them unable to get new loans when their existing deals run out.

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The Financial Services Authority (FSA) estimates that interest-only mortgages worth £120bn are due to mature over the next decade.

But under the FSA’s plans to crack down on irresponsible lending, many people with these products are likely to be unable to find replacement deals when their existing loans mature.

Unlike repayment mortgages, which involve the loans being whittled down over a set period, borrowers with interest-only mortgages do not pay off any of the capital during the term of the loan.

The idea is that borrowers make alternative arrangements to build up a pot of money that will be sufficient to pay off the mortgage at maturity.

However, following the publication of the FSA’s Mortgage Market Review last year, future interest-only mortgages will be available only to people who can show they have adequate vehicles in place that will allow them to repay the capital at the end of their borrowing terms. A borrower who simply relies on the expectation that his home will increase in value over the period of the mortgage will not be allowed to take out one of these mortgages.

That has raised the spectre of hundreds of thousands of people coming to the end of their current loans and being unable to refinance.

“There is a ticking time-bomb that’s been created over the last 20 years, and what we’re trying to do is to make sure that that ticking time-bomb does not get any worse from here on in,” said Martin Wheatley, managing director of the FSA’s conduct business unit, in evidence to the Treasury select committee.

“I don’t know that we can solve the problems of the last 20 years where people may have mortgage strategies that won’t pay off their homes.

“Individuals will have to take their own advice as to how they do that if they’ve got a strategy that will not pay the capital at maturity.”

FSA chairman Lord Turner told the MPs that a painful transition for some consumers was inevitable if the system was to be improved.

“If you’ve inherited in the past some bad lending experience and you want to have better lending rules for the future, you’ve got an inherent problem of how do you do that, because if you don’t at some stage impose the new lending rules and you allow endless rollover, you‘ll never end up with a good system,” he said.

One equity-release provider said it had already seen a rise in the number of people looking for help to cope with their interest-only mortgage problems.

“We have seen a sharp increase in the number of people releasing equity in order to settle shortfalls on interest-only mortgages,” said Steve Wilkie, managing director of Responsible Equity Release.

“With the vast numbers of interest-only loans due for repayment in the years ahead, we expect to see this trend become even more entrenched.

“What’s effectively happening is that people are having to give away part of their homes to remain in their homes.”

Mr Wilkie said there was an increase of 30pc last year in the number of customers using their equity to repay mortgages, and that trend had accelerated in early 2012.

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