Interest-Only Mortgage Repayment Vehicles
Everything you need to know about Interest Only Mortgage Repayment vehicles and how to secure the best rate
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When you’re looking to take out an interest-only mortgage, you’ll need a repayment vehicle detailing a thorough plan to satisfy most lenders’ borrowing requirements, namely that the debt will be paid off by the end of the term.
This guide covers everything you need to know about what a repayment strategy is. You’ll also learn about different types of repayment vehicles you can use, and whether you can get a mortgage without one.
Keep reading for all the details or click on a link below to head straight to a specific section…
What is an interest-only mortgage repayment vehicle?
If you take out an interest-only mortgage, you’ll need a repayment strategy for paying off the remaining debt at the end of the term. This is known as your ‘repayment vehicle’ and it’s basically your plan to cover the final balance you will owe to the lender.
It’s your responsibility to have this plan in place when you take out an interest-only mortgage and it will have to be approved by your lender. You also have to maintain this repayment vehicle throughout the life of the loan, making sure you’re still on track to pay back what you borrowed.
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What is the best repayment strategy for an interest-only mortgage?
The best strategy will depend on your personal situation and the specific lender you approach for your mortgage. The most popular repayment vehicles include options such as:
You can opt to remortgage the property, taking out either a repayment mortgage or another interest-only mortgage.
This can be quite straightforward. But, the qualifying criteria might be different in future, your age and circumstances will also likely have changed.
Using your pension
If you’re over 55 years old, it can be possible to use your pension, or part of it, as a repayment vehicle for an interest-only mortgage. Up to 25% of your pension can be withdrawn and used tax-free, but you’d need a significant retirement pot to cover the cost of a whole mortgage with this.
Some lenders will only let you use projected values ranging from 15-50% of your pension’s expected growth. And, it’s important to factor in how using these funds might impact your retirement plans.
Equity investments or a stocks and shares ISA
For those with access to a significant amount held in equities, this can be an excellent strategy to use. But, you’ll need to have documented proof of ownership of the assets under your name.
It’s important to deal with the right lender. Because some lenders will only let you use a certain percentage of the valuations as the basis for your repayment strategy. Each lender will calculate things differently and use estimated valuations from various points in time.
You can read more about stocks and shares ISAs on our sister website, Online Money Advisor.
Bonds and unit trusts
Like equities, these investments will require proof of ownership from you. Each individual lender will also treat these assets in their own way during their assessment.
You’ll need a significant level of funds set aside in your investment portfolio if this will be your repayment vehicle.
Selling the property
This is a popular choice for those with a buy-to-let (BTL) mortgage. In an ideal scenario, the property will have grown in value over the life of the interest-only mortgage. So, you can use the property as your repayment vehicle.
By selling the house at the end of the term, you can use the money to pay off the loan and hopefully have some leftover profit. But, the risk is that falling home values could leave you needing to cover a shortfall.
Savings account or cash ISA
Using some type of cash or Individual Savings Account (ISA) was more common in the past. But, the majority of lenders will no longer accept this as a suitable sole repayment vehicle. You could look into investing cash elsewhere to better utilise your long-term savings.
This was a more popular choice previously, but many borrowers were finding that the returns generated were not substantial enough to cover the remaining debt. However, there are some lenders who will still consider this option if you can prove realistic growth rates that would make paying the rest of the loan achievable.
You can read more about paying off an interest-only mortgage with an endowment policy in our guide.
How a broker can help choose the right repayment plan
Choosing the right repayment vehicle for an interest-only mortgage can feel like a tough task to get your head around. Your options may be limited by what assets you have access to. So, it’s important that you deal with the lenders who are going to be most accommodating to your financial circumstances.
Using an expert broker means that they’ll be able to introduce you to the most suitable lenders from day one. Not only this, but their existing relationships and industry knowledge will allow them to find you the best interest-only rate for the particular repayment strategy you have at your disposal.
If you want to speak with a skilled advisor, just make an enquiry. We’ll introduce you to an interest-only mortgage specialist and set up a free, no obligation chat today.
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Can you get an interest-only mortgage without a repayment vehicle?
Unfortunately not. It would be extremely difficult, if not impossible, to find a lender willing to offer an interest-only mortgage without a suitable strategy for paying back the loan. The only exception might be a buy-to-let (BTL) mortgage or a commercial mortgage. Because they are viewed as investments, they’re treated and assessed differently to a residential mortgage and repayment of the loan usually comes from the sale of the property.
What to do if you can’t pay off your interest-only mortgage
Sometimes things don’t go completely to plan. If something unexpected happens and you’re struggling to pay back your loan, you’ll still have options. There are two main scenarios that you might experience.
The first scenario is that your repayment vehicle may stray off track. The second is that you need to transition from an interest-only mortgage entirely. Let’s take a quick look at both situations:
Repayment vehicle issues
If your strategy to pay back the loan isn’t performing, it’s worth approaching your lender to discuss your situation. Or, get some professional advice.
Sometimes it’s possible to use savings held outside your repayment plan to potentially reduce the size of your loan.
It may also be worth looking into whether overpayments are available and if any extra charges apply. Your lender might also be open to an extension of the mortgage term.
Changing the mortgage type
The other path could involve adjusting the structure of the mortgage. This could mean switching to a part interest-only, part repayment (part and part) mortgage. Doing so would leave you with less to pay at the end of the term as you’d be paying back some of the balance.
If you’re over 55 years of age, another tool at your disposal is equity release. Changing to a ‘lifetime mortgage’ is a popular course of action when coming to the end of an interest-only mortgage. But, opting for this means the underlying debt is eventually covered when you die or move into long-term care. Reducing the size of your estate to pass down.
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Can you switch to interest-only temporarily?
This is possible, depending on the lender you use. Your financial circumstances can change over time. You might find that you need an interest-only mortgage for a brief period, just to make the payments more affordable.
Then, once you have a more solid financial foundation beneath you, you’re able to switch back and pay more than just the interest. This increases your monthly cost but allows you to pay back a portion of the debt.
By doing a temporary switch to interest-only, you’ll still need to have access to a suitable repayment vehicle for it to work. It’s also likely that your lender will carry out a number of new checks to review your recent credit history and current income.
Speak with an interest-only mortgage expert
An interest-only mortgage loan can provide you with some flexible options, but you’ll need to work out the most suitable repayment vehicle. Using an expert broker means that they can help you develop this strategy and then introduce you to the most appropriate lenders for your plans.
We offer a free broker-matching service. This means we’ll quickly assess your situation and pair you up with a broker who specialises in interest-only mortgages; one who’ll be able to find the mortgage solution you’re looking for.
Just call 0808 189 2301 or make an enquiry. We’ll set up a free, no obligation chat between you and your ideal broker. They’ll be able to assist you through the whole process of setting up a repayment vehicle for your interest-only mortgage.
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