Some 39 per cent of interest-only mortgage holders have no plan in place to clear the debt, according to market research consultancy BDRC Continental.
The Mortgage Achilles report estimates there are 1.8m homes in the UK on an interest-only mortgage, accounting for around 19 per cent of all outstanding home purchase mortgages.
It says there are 700,000 borrowers with an interest-only mortgage but no method of repaying the capital.
Among those with no repayment plan, 23 per cent expect to switch to a repayment mortgage while 16 per cent are relying on either selling the property or using cash savings. A further 26 per cent say they do not know how they will repay the capital.
Of the 1.8m interest-only mortgages, 22 per cent have a plan but not one which is expected to clear the debt.
Only 560,000 out of the 1.8m have an investment plan in place which is on course to clear the debt.
Around 12 per cent of all interest-only borrowers say they intend to repay the capital by selling their home at the end of their mortgage term.
BDRC Continental director Tony Wornell says: “Our research suggests that some interest-only borrowers are not engaged with the end game – what will happen when their mortgage term finishes and they have to repay the capital. Everyone with an interest-only mortgage needs a credible repayment plan. Changing to a repayment mortgage is the most certain solution but if that is not possible, borrowers could consider overpaying the mortgage or building up cash savings if they do not like the idea of an investment plan.
“Some borrowers are using a mix of methods to ensure they can clear the capital. Whatever the plan, regular review is important in staying on course. It could help if lenders got involved in this review and feedback process rather than leaving it entirely to the borrower.”
The FSA is aiming to publish a thematic review later this year on the issues faced by existing interest-only borrowers unable to repay the remaining capital at the end of the mortgage term.