The Financial Conduct Authority is concerned by the low engagement between interest-only borrowers and their lenders.
Although mortgage lenders are writing to customers before their mortgages mature many are failing to talk to their lender about repayment options, an FCA review found.
The regulator did note however that “where lenders tailored their work to specific customers types” they were better at reaching high-risk customers.
The FCA said it was worried that ultimately a number of people could end up losing their homes if more conversations aren’t facilitated.
Jonathan Davidson, the FCA’s executive director of supervision, retail and authorisations, 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.”
He 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 FCA has reviewed 10 lenders, representing 60% of the interest-only residential market.
As it stands an estimated 17.6% of outstanding mortgages are interest-only.
The regulator has previously identified three interest-only mortgage maturity peaks: One currently happening and the others will happen in 2027/2028 and 2032.
It said the next two peaks will include those more at risk of shortfalls: poorer individuals with higher income multiples at the point of application, greater rates of mortgages converted from repayment to interest-only and lower forecast equity levels.
Paul Smee, head of mortgages at UK Finance, said: “The report reveals good progress by lenders, and the industry understands the need to maintain this. It highlights some areas for improvement, which the industry will take on board.
“Lenders have already improved communication with their customers and will continue to do so, to ensure that customers looking for the right option at the end of their interest-only mortgages get the right advice and support.
Lenders also recognise the need to maintain contact with their customers through the life of their interest-only mortgages.”