Repayment vehicles are essential since a lender needs to be sure they aren't lending irresponsibly to a borrower who will not be able to repay the loan.
Some of the most common repayment strategies include:
- Pension fund withdrawals.
- Selling the property - or another portfolio property.
- Selling stocks and shares, or cashing in investments.
- Using savings such as an ISA.
Using Savings or an ISA as a Repayment Vehicle - some lenders do not accept ISA savings as a repayment strategy, so sometimes it is advisable to invest those funds in a more acceptable product.
The challenge is in working out the expected returns on your savings to arrive at an estimated value as at the end of the mortgage.
Selling Stock and Shares - a lender will need to see documents such as statements, or share certificates to verify that you hold the assets being used as your repayment vehicle. In some cases, a lender will work on up to 80% of the asset valuation to hedge the likelihood that it will not be worth 100% of the current value at the end of the term.
Other lenders work on the full projected value, whereas others will not consider anticipated returns, and only accept stocks or shares at 50% of their present valuation.
Cashing in Investments - as with selling stocks, a lender will need to see the paperwork for bonds or unit trusts to consider them a viable repayment strategy.
Endowment Policies - few lenders accept endowment policies as a repayment vehicle, given the potential for the policy to fall short on value. Where lenders will accept this, they will usually use three growth projections and take the median value as the anticipated worth.
Pension Funds - in the UK, people over 55 years old can withdraw up to 25% of their pension fund as a tax-free lump sum, which can be used as a repayment vehicle on an interest-only mortgage.
Lenders will need to see a pension statement and may assign a maximum value to projected pension pot values.
Maximum valuations tend to be between 15% and 50%, so you would need a significant pension fund to cover a more extensive property purchase. For example, if you were withdrawing the full 25% tax-free allowance, you would need a pension of between £600,000 and £800,000 to raise funds needed to cover an interest-only mortgage of between £150,000 and £200,000.
Property Sales as a Payment Strategy - another option is to plan to sell the property. If you have accumulated equity, this excess can be used from the sale proceeds to invest in another residence - typically a downsized option.
Lenders will usually place a minimum equity value on a property resale exit strategy, between £100,000 and £250,000.
Investors can also use another portfolio property sale to repay interest-only mortgages. However, most lenders will require a deduction of around 30% to be taken from the valuation to ensure there is sufficient cash to repay the debt.
