A repayment vehicle is the method or financial product you plan to use to repay the capital on an interest-only mortgage when the term ends. Because interest-only payments do not reduce the loan balance, you need a separate strategy to accumulate enough money to clear the debt.
Common repayment vehicles include ISA savings plans, investment portfolios, pension lump sums, the sale of the mortgaged property (common in buy-to-let), the sale of other assets, or a combination of these. Lenders assess the credibility of your repayment vehicle when deciding whether to approve an interest-only mortgage.
The strength of your repayment vehicle is crucial. An endowment policy was once the standard repayment vehicle, but investment underperformance left many borrowers with shortfalls. Today, lenders tend to be more cautious and require evidence that your repayment vehicle is realistic and on track. Regular reviews of your repayment vehicle against the outstanding mortgage balance are essential.
You have a £200,000 interest-only mortgage ending in 15 years. Your repayment vehicle is a stocks and shares ISA, into which you invest £750 per month. Assuming average annual growth of 5%, the ISA could be worth approximately £200,000 after 15 years. You also have the option of selling the property as a backup strategy.
Key Points
- A plan or product to repay an interest-only mortgage at term end
- Common vehicles include ISAs, investments, pensions, and property sale
- Lenders require a credible repayment vehicle for interest-only approval
- Regular reviews are essential to ensure you stay on track
- Having more than one strategy provides a safety net