The Financial Conduct Authority (FCA) has told banks to contact borrowers in an effort to prevent them defaulting on their loans.
Around 600,000 homeowners will have to repay their interest-only mortgage before 2020 and just under half will not have enough money to pay the loan back in full, according to FCA research.
The FCA said 100,000 of these borrowers have a shortfall of more than £50,000.
Most had a mortgage backed by an endowment policy, where regular savings are invested, but dismal returns on these investments mean they now face a deficit.
Over the next 30 years, around 2.6 million interest-only mortgages will be due for repayment and one in 10 people on these deals have no repayment plan at all.
The regulator estimated that half of these borrowers may not have enough money to pay off the home loan and need a “wake-up call”. Some may have to sell their home to repay the debt.
Consumer experts raised concerns that a “significant” number of people did not know how interest-only loans worked and called for further investigation.
Interest-only loans involve the borrower paying off the interest each month, but none of the capital until the end of the term.
They were popular as they let homebuyers borrow more with low monthly repayments but lenders largely stopped offering them after the credit crisis.
Jonathan Harris, director of mortgage broker Anderson Harris, says: “If you are worried about paying back the capital on your interest-only mortgage, it’s essential that you act now. Most borrowers should have enough time to work out a plan but not if they ignore the problem in the hope it goes away. It won’t.”
Martin Wheatley, chief executive of the FCA, said: “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.
“My advice to borrowers is to not bury your head in the sand – take action now.”
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