Interest-only mortgages are a ‘ticking time bomb’ for hundreds of thousands of families who have no idea how they will repay the money they owe, experts have warned.

As many as 1.9million borrowers are paying off the interest on their home loans without making a dent in the capital, figures from the Council of Mortgage Lenders (CML) show.

It is estimated that one in ten of these households have no plan in place to pay off the loan when their mortgage deal expires.

And many who do have a plan may find they do not have enough money to repay the loan in full.

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Interest-only mortgages are a ‘ticking time bomb’ for hundreds of thousands of families (file image)

Some could be forced to sell their homes to raise the money needed to pay off loans

They could be forced to sell their home to raise the funds needed.

Adrian Anderson, a mortgage broker with Anderson Harris, said: ‘We have definitely got an interest-only mortgage ticking time bomb scenario.’

The Financial Conduct Authority, the City regulator, is braced for a crunch this year and the next as a host of endowment mortgage deals agreed in the 1990s come to an end.

These deals typically saw interest-only loans sold with investments linked to the stock market that were designed to repay the capital at the end of the mortgage term.

But many policies are worth less than expected, leaving borrowers short.

It is thought a large number of these borrowers are now approaching retirement – making it difficult for them to obtain another loan to cover the repayment cost.

The CML also warned of ‘a small but material number of higher risk loans’ where borrowers have little equity in their homes – making them more vulnerable.

The group said there are 11,000 mortgage deals with two years or less left to run where the loans are worth over 75 per cent of the value of the home.

Rising house prices ‘can do little to improve the equity position for these loans’, it added.

Time bomb calculator: What it costs to move from interest-only ? Homeowners with interest-only mortgages must clear their debt in full at the end of their mortgage term - or risk being forced to sell their home. The problem is that doing this by shifting from an interest-only to repayment mortgage can be very expensive, particularly for those with a shorter loan term remaining. A homeowner with 20 years left on a £150,000 interest-only mortgage at a 3 per cent rate would see their monthly payments more than double from £375 to £840 if they moved to a repayment mortgage. A borrower with just ten years left on the same mortgage would see their monthly payments rocket from £375 to £1,465 - meaning they would need to find an extra £1,090 a month. The cost of moving from interest-only to repayment has led many borrowers to put off doing so, however, the longer they leave it the worse the so-called 'interest-only time bomb gets'. You can work out how much the move from interest-only to repayment costs with our interest-only time bomb calculator. Advertisement

It is thought a large number of borrowers are now approaching retirement – making it difficult for them to obtain another loan to cover the repayment cost

Citizens Advice chief executive Gillian Guy, pictured, said it was 'vital' borrowers got access to advice to help manage their finances

In recent years the FCA has clamped down on risky mortgage lending.

Less than two per cent of new house purchase loans are now taken out on an interest-only basis, compared to a peak of nearly 40 per cent in 2007, according to the CML.

Gillian Guy, chief executive of Citizens Advice, said: ‘Buying a home should mean security for you and your family, but for many people on an interest-only mortgage, this stability is at risk once the interest-only term comes to an end.

‘It’s vital that people have access to independent guidance, advice and support to help them manage their finances.’