Interest-Only Mortgage Repayment Vehicles Explained

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 a repayment strategy. You’ll also learn about different repayment vehicles and whether you can get a mortgage without one.

Keep reading for all the details, or click the 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 to pay 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, which will have to be approved by your lender. You also have to maintain this repayment vehicle throughout the loan’s life, ensuring you’re still on track to pay back what you borrowed.

What is the best repayment strategy for an interest-only mortgage?

The best strategy will depend on your situation and the specific lender you approach for your mortgage.

The most popular repayment vehicles include options such as:

Remortgaging

You can remortgage the property, taking out either a repayment mortgage or another interest-only mortgage.

This can be quite straightforward. However, the qualifying criteria might change in the future, and your age and circumstances will also likely have changed.

Using your pension

If you’re over 55, using your pension, or part of it, can be possible 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 Up to 25% of your pension can be withdrawn and used tax-free, but you’d need a significant retirement pot to cover the cost of a whole mortgage with this.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. Considering how using these funds might impact your retirement plans is important.

Equity investments or stocks and shares ISA

This can be an excellent strategy for those with access to a significant amount held in equities. However, 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 require proof of ownership from you. Each individual lender will also treat these assets differently during their assessment.

If this is your repayment vehicle, you’ll need to set aside a significant amount of funds in your investment portfolio.

You can read more about bonds and unit trusts on Online Money Advisor.

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 an Individual Savings Account (ISA) was more common in the past. However, the majority of lenders will no longer accept this as a suitable sole repayment vehicle. You could look into investing cash elsewhere to better utilize your long-term savings.

Endowment policy

This was a more popular choice previously, but many borrowers found that the returns generated were not substantial enough to cover the remaining debt. However, some lenders will still consider this option if you can prove realistic growth rates that would make paying the rest of the loan achievable.

In our guide, you can read more about paying off an interest-only mortgage with an endowment policy.

How a broker can help choose the right repayment plan

Choosing the right repayment vehicle for an interest-only mortgage can feel like a challenging task to get your head around. Your options may be limited by what assets you have access to. So, it would help if you dealt with the lenders 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, enquire. We’ll introduce you to an interest-only mortgage specialist and set up a no-obligation chat today.

Can you get an interest-only mortgage without a repayment vehicle?

Unfortunately, no. 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 from 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 entirely to plan. If something unexpected happens and you struggle to repay 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 for repaying the loan isn’t working, it’s worth approaching your lender to discuss your situation. You can also seek professional advice.

Sometimes, you can use savings held outside your repayment plan to reduce the size of your loan.

It may also be worth investigating whether overpayments are available and whether 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 mortgage’s structure. 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, equity release is another tool at your disposal. Changing to a ‘lifetime mortgage’ is a popular course of action when ending 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.

You could also consider switching to a full capital repayment mortgage. However, this will require a full affordability assessment and likely much higher monthly payments.

Can you switch to interest-only temporarily?

This is possible, depending on the lender you use. Your financial circumstances can change over time, so you might 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, you can 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 temporarily switching to interest-only, you’ll still need access to a suitable repayment vehicle for it to work. It’s also likely that your lender will carry out several 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 flexible options, but you must find 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 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 can find the mortgage solution you’re looking for.

Just call 0330 818 7026 or make an enquiry. We’ll set up a no-obligation chat between you and your ideal broker. They’ll be able to assist you through setting up a repayment vehicle for your interest-only mortgage.