Warning over interest-only mortgage timebomb: Borrowers face shortfalls and may even lose their homes

Many borrowers have no way to pay off their loans once the term expires

More than a quarter of a million homeowners will be unable to pay off their mortgage at the end of its term, the City watchdog has warned.

In a report published today, the Financial Conduct Authority says that almost half of those with interest-only loans have no plan to repay their debt. If they take no action they could be forced to sell their homes.

Martin Wheatley, the chief executive of the FCA, said: "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."

Lenders have agreed to contact at-risk borrowers to alert them to the danger of losing their home if they fail to arrange a way to repay their debt.

Some 2.6 million interest-only mortgages are due for repayment over the next 30 years, but the FCA's research has revealed that one in 10 borrowers has no plan for repaying it.

It also shows that nearly half of those with interest-only mortgages due to mature before 2020 are likely to have a shortfall, a third of which are expected to be more than £50,000.

Even those who are aware that they will face a shortfall in the next few years seriously underestimate the scale of the debt gap they face. Borrowers thought their shortfall would be £22,100 on average, rather than £50,000 or more, the figure the watchdog reckons.

The report raises fresh concerns that thousands of interest-only loans were mis-sold. It says that it is not clear whether some borrowers understood the discussions about how the mortgage was meant to be repaid when they took the deal out.

Richard Lloyd, an executive director of the 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. We hope the FCA looks into this further to establish whether lenders made it completely clear to interest-only borrowers that they would need a repayment plan, to be sure that there wasn't widespread mis-selling."

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