Home owners with interest-only mortgages are being urged to act now and talk to their bank or building society after the City regulator found many people are yet to discuss repayment options with their lender.
Nearly one in five mortgage customers have an interest-only home loan, the Financial Conduct Authority (FCA) said - and it is concerned that shortfalls in repayment plans could lead to people losing their homes.
The FCA said, although mortgage lenders are writing to customers before their mortgage matures, engagement rates with firms are low.
A review by the FCA covered lenders representing around 60% of the interest-only residential mortgage market.
Interest-only deals allow borrowers to pay off the capital only when
the mortgage term ends but concerns have been raised in recent years that many may not have adequate plans in place to eventually clear their debts.
Some could end up having to sell their home to pay the loan back if
they do not take stronger control of their repayment planning.
The FCA said there are 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK.
It said these represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment.
Jonathan Davidson, executive director of supervision - retail and authorisations at the FCA, said good progress has been made in reducing the number of people with interest-only mortgages.
He continued: "However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes."
Mr Davidson said the FCA is encouraged to see that lenders have taken positive steps to engage with and help their interest-only customers.
He continued: "However, as the number of maturities start to increase towards 2032, it is important that lenders take time to review and, where possible, improve, their own strategies."
The FCA found that lenders are actively trying to communicate with their customers to understand repayment strategies and to provide appropriate and affordable solutions where needed.
But for most lenders, the engagement is based on writing to customers at specific times before a deal ends.
Where lenders tailored their work to the different customer types identified, they were able to increase contact with those considered higher risk.
The FCA also found that, although lenders were recommending repayment options that appeared appropriate, the processes which customers had to follow were, on many occasions, challenging.
This included delays in getting to speak to advisers, making multiple phone calls and repeating information previously provided.
In 2013 the regulator identified three interest-only mortgage maturity peaks on the horizon.
The first peak, happening now, is likely to have more modest shortfalls due to many of these home owners having higher levels of equity.
But the next two peaks in 2027/2028 and 2032 include less affluent people. The FCA is concerned that they are more at risk of shortfalls.
Paul Smee, head of mortgages at trade association UK Finance said: "The report reveals good progress by lenders, and the industry understands the need to maintain this. It highlights some areas for improvement, which the industry will take on board.
"Lenders have already improved communication with their customers and will continue to do so, to ensure that customers looking for the right option at the end of their interest-only mortgages get the right advice and support.
"Lenders also recognise the need to maintain contact with their customers through the life of their interest-only mortgages."
The FCA has produced a leaflet to highlight the benefits to home owners on interest-only deals of talking to their lenders. The guidance includes:
- 1. Speak to your lender or mortgage adviser - they may have options which you can discuss together and may give you peace of mind.
- 2. Do not delay - it is your responsibility to repay the loan at the end of the term. The earlier you speak to your lender or mortgage adviser, the more time you have to make a difference.
- 3. If you would rather talk to someone else first, you can get help from the Money Advice Service (MAS), Citizens Advice (CAB) or other organisations for free.