FCA Regulations and the Repayment Vehicle Requirement
The FCA requires that all interest only mortgage applicants demonstrate a credible and verifiable plan to repay the outstanding capital at the end of the mortgage term. This repayment vehicle must be separate from the mortgaged property itself — for most borrowers, a plan to sell the property to repay the mortgage is not acceptable as a primary repayment strategy (though some lenders accept it for older borrowers under specialist products).
Acceptable repayment vehicles typically include: an endowment policy or investment-linked product specifically designed to repay the mortgage; an ISA or investment portfolio of sufficient value or projected value; pension lump sum, where the projected lump-sum benefit exceeds the outstanding balance; sale of a second property or other specific asset; or an inheritance, where there is documented evidence of a specific, likely inheritance sufficient to repay the balance.
Lenders assess repayment vehicles differently, and the quality of evidence required varies significantly between providers. Some lenders require independent financial advice on the repayment vehicle; others are satisfied with self-declaration and documentary evidence. A specialist mortgage broker with experience in interest only lending can identify which lenders take the most accommodating approach for your specific repayment vehicle.
The FCA has continued to monitor interest only mortgages closely. In its 2022 and 2023 mortgage market reviews, the regulator expressed ongoing concern about borrowers with legacy interest only mortgages who lacked adequate repayment vehicles — and highlighted that many of these borrowers are now in their 60s and 70s, facing an imminent capital repayment crisis.
Who Uses Interest Only Remortgages?
Interest only remortgages are used by several distinct borrower types, each with different motivations and circumstances. Buy-to-let landlords represent the largest group: most buy-to-let mortgages are offered on an interest only basis, as landlords typically plan to repay the capital through the eventual sale of the investment property. This is generally accepted by lenders as a legitimate repayment strategy for investment properties.
High-net-worth individuals and borrowers with substantial investment portfolios may prefer interest only to maximise cash flow, using the difference between interest only and capital repayment payments to invest in higher-return assets. Some sophisticated borrowers maintain interest only mortgages deliberately as a form of financial leverage, particularly when expected investment returns exceed the mortgage interest rate.
Older borrowers — typically those over 55 — represent a growing interest only market, through products such as retirement interest only (RIO) mortgages. These are specifically designed for older borrowers who cannot demonstrate affordability for a standard capital repayment mortgage on retirement income, but who can demonstrate they can afford the monthly interest payments. RIO mortgages typically have no fixed term — the loan is repaid on death or entry into long-term care, usually from the sale of the property.
Some borrowers switch from capital repayment to interest only temporarily during periods of financial difficulty, as a way of reducing monthly payments without formally extending the term. This is possible with some lenders but typically requires an affordability assessment and is subject to the repayment vehicle requirement.
