Many UK lenders have a sizeable book of interest-only mortgages, a substantial portion of which are due to mature in the next five to 15 years.
The FSA said at present, interest-only mortgages are starting to reach maturity in relatively low volumes and in the lower loan-to-value ranges.
But it added: “In the medium to long term, the outstanding balances, as well as the loans-to-value of these maturing mortgages, are expected to increase significantly.
“Consequently, both lenders and borrowers need to pro-actively plan for the maturity of these mortgages.
“This issue, including the fair treatment of borrowers in this situation, is something that we will be monitoring closely.”
The problem may be exacerbated by the lack of new interest-only lending. The FSA said today there has been the reduction in the availability of interest-only mortgages from lenders, particularly for first-time buyers.
It revealed figures showing that while the sale of interest-only mortgages rose sharply between 2002 and 2007 - peaking at a third of all mortgage sales in 2007 - they now account for around 15% of regulated mortgage sales.
The FSA confirmed plans for a thematic review of interest-only to inform its view on the conduct issues that arise when interest-only borrowers reach mortgage maturity without the means of capital repayment.
This will examine the policies, procedures and strategies in place across a range of firms, and consider their compatibility with the fair treatment of consumers.
