Interest-only mortgage holders urged to plan ahead

Some borrowers with interest-only mortgages that are due to mature in the next seven years may not be able to fully repay their loan, a report by the Financial Conduct Authority (FCA) has warned.

The report found that nearly half of the 2.6 million households with this type of mortgage due for repayment in the next 30 years may struggle.

The average shortfall could be over £50,000, the FCA said.

Interest-only mortgages typically allow borrowers to make monthly repayments that cover just the interest on the amount borrowed. The full amount is then paid back when the mortgage term matures - typically after 25 years - using funds such as savings or inheritance.

Lenders will first be contacting those borrowers with mortgages maturing before 2020 in order to help them find a solution.

For interest-only mortgage borrowers, the FCA's report found:

  • There are 600,000 borrowers with mortgages due to mature before 2020
  • 90 per cent of these have a repayment plan in place
  • Just under half are likely to have a shortfall
  • Shortfalls of more than £50,000 are expected for a third of those due for repayment before 2020.

The FCA's chief executive, Martin Wheatley, said that this type of pre-emptive work would form a large part of the regulator's future operations.

"Mortgage lenders have volunteered to contact their most at-risk customers with a ‘wake-up call' to highlight the report's findings and what they need to do without delay. We welcome this move and also the sector's commitment to helping its customers try and find a solution - but people must engage with them.

"My advice to borrowers is to not bury your head in the sand - take action now. Understand the terms of your mortgage agreement and take control; work out if you can repay the outstanding amount when your mortgage matures. But you must engage with your lender to discuss how you propose to repay the outstanding loan."

The FCA is urging borrowers, particularly those with mortgages due to be repaid before 2020, to take control of their mortgage repayment planning.