The regulator is concerned that significant numbers of interest-only customers have shortfalls in their repayment plans and have not contacted their lender to talk about options.
Almost in one in five of all UK mortgage customers are on interest-only deals – a total of around 1.67m.
Mortgage lenders are writing to interest-only customers ahead of deals maturing to check repayment strategies are on course, but many borrowers are not engaging, the FCA found, as part of its review on the treatment of interest-only borrowers.
The thematic review covered 10 lenders who represent around 60% of the interest-only mortgage market.
The FCA also ordered lenders to improve their strategies for dealing with customers who did make contact, after finding many faced delays to speak to advisers, made multiple phone calls and were handed repeat information.
Jonathan Davidson, FCA executive director of supervision – retail and authorisations, said: “Since 2013 good progress has been made in reducing the number of people with interest-only mortgages.
“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.”
Customers have now been urged to talk to their lender sooner rather than later.
Davidson added: “We are encouraged to see that lenders have taken positive steps to engage with and help their interest-only customers.
“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 three interest-only peaks
In 2013 the FCA identified three residential interest-only mortgage maturity peaks.
Borrowers in the first peak, happening now, will typically have modest shortfalls in capital repayment with the customers typically having higher incomes, assets and levels of forecast equity in their property at the end of term.
But the next two peaks in 2027/2028 and 2032 include less affluent individuals who had higher income multiples at the point of application, greater rates of mortgages converted from repayment to interest-only and lower forecast equity levels.
The FCA is worried these borrowers are at greater risk of shortfalls.
The regulator has not revealed the number of high-risk customers that could struggle to repay the capital on their loan.