Interest-Only Mortgages: Warning Against Over-Optimism In Clearing Debts
Some mortgage borrowers who only pay the interest on their loan are being "overly optimistic" about their ability to clear their final debt, data shows.
Interest-only deals require borrowers to have a plan to pay off the loan - known as the capital - at the end of the mortgage term.
But research by the Financial Conduct Authority (FCA) suggests some people do not realise they face a shortfall.
The warning comes as rising costs mean interest-only deals may become popular.
They have become an option for some people who think they will struggle to make higher monthly repayments on more widely-used repayment mortgages, in which borrowers pay off both the interest and the capital.
David Geale, director of retail banking at the FCA, said that a final plan to pay off the capital was "a challenge" for some interest-only 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," he said.
More than eight in 10 (82%) of interest-only customers were confident in their ability to cover the final cost of the mortgage, the FCA survey found.
While 36% said they might have a shortfall in funds when it came to making the final payment, the FCA estimated that the actual figure was likely to be 46%.