The Financial Conduct Authority said people should discuss options with their lenders.
One in 10 interest-only mortgage holders might be “overly optimistic” about paying off their debt when the time comes, the City watchdog has suggested.
The Financial Conduct Authority urged those with interest-only mortgages to discuss options with their banks.
People with those loans pay only the interest on their loan every month, rather than paying the interest and also paying down their loan. However, by the time the period comes to an end they need to pay off the loan.
It means that their monthly payments are smaller, but as a whole the mortgage will be more expensive as they pay interest on the full amount they borrowed for the full term of the mortgage.
Research commissioned by the FCA showed that 82% of borrowers were confident that they could repay what is left on their loan at the end of the mortgage term.
“However, the research suggests this may be overly optimistic – while 36% of borrowers expected some shortfall, modelling suggests this could be closer to 46%,” the FCA said on Tuesday.
“Borrowers without a repayment plan are encouraged to speak to their lender to discuss their options,” it added.
“Simply speaking to your lender will not affect your credit rating, and steps can be taken now to provide a greater range of options at the end of the mortgage term.”
Data crunched by the FCA showed that there were 774,000 purely interest-only mortgages at the end of June last year. There were also 240,000 part interest-only mortgages.
This is around half the number that existed in 2015, the FCA said.
According to an online survey with 987 usable answers carried out by Opinium in January, 17% of participants said they took out an interest-only mortgage because it was the only type they could afford.
The most common reason for choosing an interest-only mortgage was due to “advice from adviser or broker”, at 31%, the research found.
FCA director of retail banking David Geale said: “While it is encouraging to see the number of interest-only mortgages reducing faster than expected, with the majority of loans being paid off or transferred to other products, the challenge remains for a significant number of borrowers.
“Taking an interest-only mortgage can mean lower monthly payments, but borrowers need a plan to repay the outstanding balance when the mortgage comes to an end.
“If you have an interest-only mortgage and are unsure if your current plan is sufficient, speak to your lender as soon as possible to discuss your options.”