Best Repayment Vehicles For Interest-Only Mortgages

For years, interest-only mortgages have been advertised as a way to keep your monthly housing costs low. 

Pay only the interest each month and deal with the actual loan amount later. 

But that “later” part can be tricky without a solid plan.

The good news is you can  build a “repayment vehicle” – an investment or savings plan to grow until it can pay off the mortgage.

In this article, you’ll learn how these vehicles work, the pros they offer, and how to pick the best option for your financial future. 

By the end, you’ll understand how to manage an interest-only mortgage and make smart decisions for your future.

What Is an Interest-Only Mortgage Repayment Vehicle?

An interest-only mortgage repayment vehicle is essentially your master plan for paying back the original loan amount at the end of your mortgage term. 

Remember, with an interest-only mortgage, your monthly payments only cover the interest. 

That means the capital (the actual loan amount), still needs to be paid back in full eventually. Sounds like a big ask? 

It can be, but that’s where your repayment vehicle steps in to save the day.

Think of it as a financial safety net. Whether it’s through investments, savings, or even selling the property, you need a strategy to cover the debt. 

The catch is that not all repayment vehicles are created equal, and lenders can be quite picky about which ones they’ll accept.

Can You Get an Interest-Only Mortgage Without a Repayment Vehicle?

In short, no. 

Lenders want to make sure that you’re not going to end up in financial hot water when the mortgage term comes to an end. 

That’s why they require you to have a repayment strategy sorted out before they’ll even consider giving you an interest-only mortgage. 

The only real exceptions are for buy-to-let or commercial mortgages, where the property itself often acts as the repayment vehicle.

What Are the Best Repayment Vehicles for Interest-Only Mortgages?

So, what are your options? 🤔

Here are some of the most common repayment vehicles for interest-only mortgages, along with a few pros and cons to help you figure out which might be right for you.

1. Remortgaging

Ideal if you have a good credit history and big equity in your property.

If you’re looking for flexibility, remortgaging is a strong contender. 

You can switch to a repayment mortgage or even another interest-only mortgage with more favourable terms. 

It’s often a good option if your circumstances have changed, such as an increase in income or property value.

Pros:

• Lower monthly payments
• Better interest rates
• Extended mortgage term

Cons:

• May require meeting stricter lender criteria
• Potential fees and charges

2. Additional Property or Assets (e.g., Buy-to-Let)

Ideal for property investors with multiple assets and experience managing rentals.

If you’ve got a rental property or two, this could be the way to go. 

You can use rental income to cover your repayments and sell the property later if needed. This strategy is particularly useful for landlords with buy-to-let properties.

Pros:

• Generates income
• Potential for property value appreciation
• Proceeds from selling the property can repay the mortgage

Cons:

• Property market risks
• Maintenance costs
• Potential for rental void periods

3. Pension Lump Sum

Ideal if you’re close to retirement with a robust pension plan.

Planning for retirement? You can use up to 25% of your pension tax-free to clear your mortgage. 

But make sure your pension pot is large enough to cover the entire mortgage balance, as dipping into it could reduce your retirement income.

Pros:

• Tax-efficient
• Suitable for those over 55

Cons:

• Can significantly reduce retirement income
• Some lenders may have limitations on using pension funds for mortgage repayment

4. Regular Overpayments

Ideal if you have a steady income and a clear goal to reduce mortgage debt.

Making regular overpayments can help you reduce your mortgage balance faster, saving on interest and shortening your mortgage term. 

But before you overpay, check your mortgage terms for overpayment limits. Exceeding these limits may result in fees. 

If in doubt, chat with your lender or advisor for clarity.

Pros:

• Flexibility: Make overpayments whenever you can.
• Interest savings: Pay less interest over time.
• Faster debt reduction: Build equity faster.

Cons:

• Requires discipline and extra income
• Lenders may have overpayment limits

5. Stocks & Shares ISAs

Ideal for those with a higher risk appetite and a diversified investment portfolio.

If you’re willing to take on some risk, investing in stocks and shares ISAs can potentially generate the growth needed to repay your mortgage. 

However, lenders may only consider a portion of the investment value due to market fluctuations.

Pros:

• Potential for higher returns
• Tax advantages

Cons:

• Market volatility can reduce investment value
• Some lenders may have limitations on using ISA funds for mortgage repayment

6. Investment ISAs & Unit Trusts

Investment ISAs and unit trusts are similar to stocks and shares ISAs but generally have lower risk. 

They can still offer growth for mortgage repayment, but you’ll need documentation to prove ownership and valuation.

Pros:

• Diversified holdings
• Potential for steady growth

Cons:

• Returns aren’t guaranteed
• Lenders may only recognize a portion of the current valuation

7. Endowment Policies

Ideal for those with existing endowment policies who are confident in their projected returns.

Endowment policies were once popular but are now less common. While they offer life insurance and potential investment growth, they often underperform. 

Lenders may accept them if you can demonstrate strong growth projections, but they are less reliable than other options.

Pros:

• Includes life insurance
• Potential for investment growth

Cons:

• Historically, many have underperformed
• May not provide sufficient funds for mortgage repayment

8. Savings Account or Cash ISA

Ideal for risk-averse savers who want to use this as part of a diversified approach.

Savings accounts and cash ISAs were once popular, but most lenders no longer accept them as the sole repayment vehicle. 

They can still be part of a broader strategy.

Pros:

• Low risk
• Easy access to savings

Cons:

• Low returns make it unlikely to cover the entire mortgage

9. Sale of the Property

Ideal for those planning to downsize or relocate to a less expensive area.

This option is often the last resort. You can sell your home or rental property to repay the mortgage, but it’s not without risk. 

It’s a popular choice for those with buy-to-let properties or who plan to downsize.

Pros:

• A straightforward way to repay the mortgage if your property value has increased.

Cons:

• Falling property prices can result in insufficient funds.
• You may become homeless.

What If My Repayment Vehicle Falls Short?

Life can be unpredictable. And sometimes your repayment strategy might not work out as planned. 

If you find yourself struggling to repay your interest-only mortgage, there are still options:

• Extend the Mortgage Term. Ask your lender if you can extend the mortgage term. This gives you more time to sort out your finances.
• Switch to a Repayment Mortgage. You could switch to a full or part repayment mortgage. This will increase your monthly payments but reduce the final amount you owe.
• Consider Equity Release. If you’re over 55, you might be eligible for equity release, which allows you to access some of the property’s value without selling it.
• Apply for a Retirement Interest-Only (RIO) Mortgage. For those in retirement, a RIO mortgage can be a suitable option. It allows you to pay just the interest each month, with the loan repaid from the sale of your home when you pass away or move into long-term care.
• Rent Out Part of Your Property. If it’s suitable, renting out a room or a part of your property could provide an additional income stream to help you meet mortgage payments or build a new repayment strategy.
• Borrow from Family or Friends. It’s not ideal, but if you have someone willing to help, borrowing from family or friends could provide a short-term solution. Make sure to formalise the agreement to avoid misunderstandings.

Can I Switch to Interest-Only Temporarily?

Yes, it’s possible.

Some lenders allow you to switch to interest-only payments for a short period if you’re going through a tough financial patch. 

Just keep in mind that you’ll still need to have a repayment vehicle in place, and your lender will likely want to review your financial situation before agreeing.

The Bottom Line: What’s Next?

Choosing a repayment vehicle for an interest-only mortgage can be difficult. 

Create a clear plan before your mortgage term ends to avoid financial stress and prepare for unexpected changes.

And remember, you don’t have to do it alone. A mortgage broker can help you:

• Save you time and effort.
• Tailor solutions to your needs.
• Access a wider range of lenders.
• Help you avoid costly mistakes.

Still unsure? Get in touch with us. We’ll connect you with a trusted expert who can guide you through your mortgage journey and find the perfect solution for your situation.