HUNDREDS of thousands of borrowers with interest-only mortgages could risk their homes by ignoring how they are paid off, the City watchdog has warned.

The Financial Conduct Authority (FCA) said a fifth of mortgage customers have such loans but many have still not asked their lender about their repayments options.

Now it is urging people with interest-only deals to contact their lender.

The FCA found that although lenders are writing to customers before their mortgage matures, engagement rates with firms are low.

Its review covered ten lenders who represent around 60 per cent of the interest-only residential mortgage market and looked at how lenders treated these customers to help ensure their mortgages were repaid at maturity.

There are around 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK – 17.6 per cent of all outstanding mortgage accounts – and over the next few years increasing numbers will have to be repaid.

The FCA found that lenders were actively trying to communicate with their customers to understand repayment strategies and to offer appropriate and affordable solutions where needed.

However, for most lenders, that engagement was based on writing to customers at specific times before mortgage maturity.

Where lenders tailored their work to the different customer types identified, they were able to increase contact with those considered at higher risk.

The FCA also found that, although lenders were recommending repayment options that appeared appropriate for those customers who did make contact and that the harm of repossession for non-repayment was reduced, the processes customers had to follow were frequently challenging.

This included delays in being able to speak to advisers, making multiple phone calls and repeating information previously provided.

In 2013 the FCA identified three residential interest-only mortgage maturity peaks. The first – happening now – is likely to have more modest shortfalls due to the profile of customers, typically those who are approaching retirement with higher incomes, assets and levels of forecast equity in their property at the end of term. 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 that this group is more at risk of shortfalls.

Jonathan Davidson, an FCA executive director, said: “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.

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons.

“We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.

“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.”