However, according to research commissioned by the Financial Conduct Authority (FCA), 90% of the 600,000 borrowers at immediate risk with terms maturing before 2020 have a repayment plan in place.

In the FCA’s interest-only review out today, the FCA said it has also reached agreement with lenders to contact interest-only borrowers after confirming just 27% of all interest-only borrowers had been contacted so far.

Of the mortgages maturing in the next five years, 70% planned to repay the capital with an endowment policy, confirmed the FCA. Typically these people have relatively high incomes, high assets and high levels of forecast equity in the property at the end of the term, so have flexibility even if this plan doesn’t work, it said.

Today, the regulator also issued a set of proposed guidance for lenders to help them manage back books of customers with poor or no repayment plans. 

Entitled ‘Helping lenders achieve good outcomes for borrowers, some of the proposed measures include:

• Having a written strategy setting out the firm’s policy and procedure for managing mortgage loans that might not be repaid at the end of the term;
• Training front line staff on how to deal with borrowers in line with their strategy to ensure a fair outcome;
• A communications strategy which encourages consumer engagement;
• Assessing affordability if any variation to an existing mortgage significantly increases monthly repayments or revised terms extend the loan into retirement;
• Giving customers sufficient time to consider their options around repaying their mortgage; and
• Collecting sufficient management information to establish whether their overall strategy to the maturity of interest only mortgages is working.

The report is the result of a comprehensive review of interest-only loans announced in the Mortgage Market Review rules last December.

The regulator has enlisted the help of the Council of Mortgage Lenders and the Building Societies Association to ensure lenders contact their borrowers to discuss payment options.

The regulator said this action is in line with its new pre-emptive regulatory stance and aims to prevent interest only borrowers defaulting on their loans in the future.

Meanwhile, many lenders withdrew from interest-only entirely or tightened criteria to only lend to high-net worth borrowers after Martin Wheatley’s comments in March 2012 over the interest-only “ticking timebomb.”

The outlook for the product remains uncertain, as since then, Martin Wheatley, has suggested lenders may have been hasty in withdrawing from the market.

Earlier this month, he admitted the FSA needed to navigate a “careful path” between a market without interest-only and detriment from the product ending up in the wrong hands.

Today, Wheatley, said: “By acting now we are aiming to nip this problem in the bud. This is a landmark piece of work and it comes at a critical time: lenders, regulators, and borrowers need to ensure that they grasp the nettle now before it is too late.”

For more on the future of interest-only, click HERE