LONDON (Reuters) -Nearly half of people with interest-only mortgages may be too optimistic about their ability to pay the outstanding capital, Britain's Financial Conduct Authority said on Tuesday.

Interest-only mortgages are typically favoured by wealthier customers but sharp increases in Bank of England interest rates mean that borrowers face big hikes in monthly interest payments.

The FCA said there are fewer than one million interest-only mortgages outstanding, down by half since 2015, as borrowers move in greater numbers onto repayment loans, or repaying earlier than expected.

Of those remaining, 72,000 are not due to mature until 2031, with 77,000 in 2032, with a smaller peak in 2027, meaning borrowers without a capital repayment plan still have time to act, the watchdog said in new research on Tuesday.

"Whilst it is encouraging to see the number of interest-only mortgages reducing faster than expected, with the majority of loans being paid off or transferred to other products, the challenge remains for a significant number of borrowers," David Geale, director of retail banking at the FCA, said in a statement.

FCA research found that 82% of the borrowers were confident in their ability to repay outstanding capital at the end of the loan's term.

"However, the research suggests this may be overly optimistic – while 36% of borrowers expected some shortfall, modelling suggests this could be closer to 46%," the FCA said.

"The FCA will now be engaging with industry and consumer groups to discuss the research findings and how lenders can further support borrowers who may not be able to repay all the capital owed at the end of their mortgage term."

(Reporting by Huw Jones; editing by John Stonestreet and Sharon Singleton)