What is an interest-only repayment vehicle, and how do they work?
This guide will explain everything you need about the repayment plans, monthly repayments strategy and the end of the term mortgage balance, which are repayment vehicles for interest-only mortgages.
This guide will also explain the different repayment options available and whether getting a mortgage without one is possible.
What are interest-only loan repayment mortgages?
A repayment strategy is required to pay off any interest-only mortgage term. This is called your “repayment strategy”, and it’s your full repayment mortgage plan to pay off the remaining balance you owe the lender.
This plan must be in place before you apply for an interest-only mortgage. Your lender will need to approve it.
This repayment plan must be maintained throughout the term of your loan to ensure that you are on track to repay the amount borrowed at the end of the mortgage.
Which is the best way to repay an interest-only mortgage?
Your personal situation and the mortgage lender you approach will determine which strategy is best. These are the most popular options for repayment:
Remortgaging
You have the option to remortgage your property by taking out a repayment mortgage or an interest-only mortgage.
It can be straightforward. However, future qualifying criteria may differ, and your age or circumstances might have changed.
Using your pension
You can use your pension or a portion of it as a repayment vehicle for an interest-only mortgage. You can withdraw up to 25% of your pension and use it tax-free. However, you would need a substantial retirement pot to pay the entire mortgage cost.
Some lenders won’t allow you to use projected values between 15-50% of the expected growth rate of your pension. It’s also important to consider how these funds could impact your retirement plans.
Equity investments, or a stocks-and-shares ISA
This strategy is excellent for those who have substantial equity assets. However, you will need to provide documentation of ownership.
It is essential to choose the right mortgage lender. Some lenders won’t allow you to use all valuations for your repayment strategy. Every lender calculates things differently and will use estimates from different points in the past. This is where our mortgage brokers can help you.
Unit trusts and bonds
These investments, like equities, will require proof that you own them. During their assessment, each lender will treat these assets differently.
If you plan to use this as your repayment strategy, you will need a substantial amount of money in your investment portfolio.
The property can be sold.
This is a popular option for people with a mortgage. The property should have increased in value over the interest-only mortgage term. You can also use the property to repay your loan.
You can sell the house before the term ends to make the loan payment and possibly have some profit. The downside is that you may have to pay more if your home’s value falls.
Cash ISA or savings account
In the past, using some form of cash or Individual savings account (ISA) was more common. However, most lenders won’t accept this as a sole repayment strategy. You could consider investing in cash elsewhere to utilise your long-term savings.
Endowment policy
Although this was a popular option, many borrowers found that the returns were insufficient to pay off the remaining debt. Some lenders will still consider this option if you can show realistic growth rates that allow you to repay the remaining loan.
Our guide contains more information about paying an interest-only mortgage with an Endowment Policy.
How a broker can help you choose the right repayment plan
Choosing the right repayment option for an interest-only mortgage can be challenging. The assets you have available may limit your options. It is essential to find the best lender for your financial situation.
An expert broker such as Loan Corp will be able to connect you with the best lenders right away. They will be able to recommend the most suitable lenders based on their industry connections and knowledge.
Contact us today to talk with an interest-only mortgage specialist.
Is it possible to get an interest-only mortgage with no repayment option?
It is not. It is difficult, if not impossible, for a lender to offer an interest-only loan without providing a repayment plan.
A buy-to-let mortgage (BTL) or a commercial mortgage might be an exception.
They are considered investments and are treated differently from residential mortgages. The sale usually makes the repayment of the loan of the property.
What to do if your interest-only mortgage is not paying off?
Sometimes things do not go according to plan. You still have options if something happens that isn’t expected, and you are unable to repay your loan. Two scenarios are possible.
First, your repayment plan may be off-track. The second scenario is when you completely get rid of an interest-only mortgage. Let’s have a look at both of these situations.
Repayment issues
It’s worth speaking to your lender if your plan to repay the loan doesn’t work. Get professional mortgage advice here.
It is possible to reduce your loan amount by using savings that are not part of your repayment plan.
You might also want to check whether there are any overpayments available or if additional charges apply. The lender may be willing to extend the mortgage term.
Modifying the type of mortgage
Another option is to modify the mortgage structure. This could be a partial interest-only, partial repayment (part and half) mortgage. If you did this, you’d have less money at the end of your term, as you would be repaying some of the balance.
Equity release is another option for those over 55. When you are ready to end an interest-only mortgage, a standard option is to change to a ” lifetime mortgage”. This means that the debt will be covered when you die or move into long-term care. Reduce the estate size to be passed down.
Another option is to switch to a full-capital repayment mortgage. This will require a complete affordability evaluation and possibly much higher monthly payments.
Is it possible to temporarily switch to interest-only?
This depends on which lender you use. You might find your financial situation changing over time. You might need an interest-only loan to lower your monthly payments for a short time.
Once you have a more robust financial foundation, you can switch back to paying more than the interest. This will increase your monthly cost, allowing you to repay a portion of the debt.
You will still need to be able to access a suitable repayment vehicle to allow a temporary switch from interest-only to work. Your lender may conduct a series of checks to check your credit history and income.
Talk to an interest-only mortgage expert.
An interest-only mortgage loan may offer flexibility, but you must determine the best repayment option. An expert broker can help you create this strategy and introduce you to the best lenders for your needs.
We will arrange a complimentary, no-obligation chat between you and the broker that suits your needs. They will be able to assist you throughout the process of setting up a repayment plan for your interest-only loan.