Fears rise of mortgage "ticking time bomb" Claims management companies that feed off compensation payments made by banks are shifting their attention to interest-only mortgages as fears grow that tougher regulation could open the doors to a future mis-selling scandal. Lenders are increasingly concerned that a looming clampdown on these mortgages, which do not require borrowers to pay off the capital each month, will put the onus on them to ensure customers can afford to repay the loans at the end of the term. Rules, which are set to be announced this week by the Financial Services Authority, are expected to include a requirement that lenders check at least once during the life of the mortgage that borrowers will be able to repay the loan. Banks and building societies fear this could give false assurances to borrowers, increasing the risk that they do not monitor whether their repayment vehicle is adequate. They have warned this could enable claims management companies (CMCs) to create a "firestorm" by blaming lenders for any shortfalls that borrowers face when it comes to repaying their loans. These groups, which submit compensation claims from consumers for a share of the payout, have pocketed hundreds of millions of pounds from the £10bn mis-sold payment protection insurance scandal. There is little evidence to support claims that interest-only mortgages have been mis-sold in the past. Banks say they write to borrowers regularly telling them they will still owe the original mortgage sum at the end of the term. They also point out it is the customers" responsibility to have an adequate repayment vehicle in place. Nevertheless a number of lenders have recently pulled back from the market. Matthew Wyles, group distribution director at Nationwide, which stopped offering interest-only mortgages this month, said the building society was "not prepared to operate with a regulatory backdrop that is increasingly threatening and uncertain." The FSA believes these rules are necessary to allay concerns it has about interest-only loans, which account for more than 40 per cent of the UK's total mortgage book. Martin Wheatley, the incoming head of the Financial Conduct Authority, this year warned of the "ticking time-bomb" of interest-only borrowers in their 50s who had no way to repay the capital. The FSA is working on a separate investigation into interest-only loans to assess the scale of the problem. Data from the Council of Mortgage Lenders show that in 2007, the peak of the housing boom, one in three new loans were sold on an interest-only basis and almost 75 per cent of those had no reported repayment plan. Analysts said activity from claims groups around interest-only mortgages was limited but picking up. "Some larger CMCs are thinking about repositioning after PPI and interest-only mortgages are on their radar," said someone familiar with the industry. Smaller providers are setting up websites such as Missoldinterestonly.com to encourage borrowers to make claims.