Interest-Only Borrowers Face 'Wake-Up Call'

Up to half of homeowners with interest-only mortages do not have enough money to pay back the loans, according to the new City watchdog.

The Financial Conduct Authority (FCA) fears consumers are under-estimating the scale of the problem and is urging them to "act now".

Interest-only mortgages allow borrowers to pay off the capital only when the mortgage term ends, enabling them to maximise their borrowing capacity.

They have become much harder to obtain since the credit crunch, with most banks now demanding borrowers have the equivalent sum tied up in stocks, savings or another property.

But the FCA believes around 260,000 people still on the deals have no repayment strategy.

Borrowers surveyed as part of the FCA's research thought their shortfall would be around £22,100 on average but the regulator's estimates suggest around half would exceed £50,000.

Some could end up having to sell their home to pay the money back if they do not take control.

FCA chief executive Martin Wheatley said: "By acting now we are aiming to nip this problem in the bud.

"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."

He added: "My advice to borrowers is to not bury your head in the sand - take action now."

Around 2.6million interest-only mortgages are due for repayment over the next 30 years but research reveals one in 10 have no plan for paying the money back.

The FCA report said it was not clear how well some borrowers understood the discussions about how the mortgage was meant to be repaid when they took the deal out.

Some 13% of interest-only borrowers said they did not know they needed a plan to repay the whole amount borrowed, not just the interest - and a further 6% were unsure.

However, those unaware of the need for a repayment strategy were more likely to have signed up longer ago, the report found.

Just one in 40 people (2.5%) who said they were unaware still has no repayment plan in place. 

Campaigners are also calling for more work to make sure borrowers were not mis-sold deals.

Richard Lloyd, executive director of consumer group Which?, said: "We're worried that a significant proportion of consumers say they did not know they needed a separate repayment plan on their interest-only mortgage."

The FCA said it is concentrating its efforts on making sure that the people whose interest-only mortgages are maturing will have a way of paying their loan back.

It is thought that despite the report's findings, there are no particular jumps in mortgage complaints figures to suggest that the way that interest-only mortgages were sold was a widespread problem.

A Council of Mortgage Lenders (CML) spokesman said that the body's focus will be on helping those who still have no strategy in place for repaying their mortgage.

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