FCA Requirements for a Credible Repayment Vehicle
The FCA's MCOB rules specify that lenders offering interest only mortgages and secured loans must assess whether the borrower has a credible and realistic repayment strategy. This requirement emerged from the historic issues seen in the first charge mortgage market, where thousands of borrowers reached the end of interest only terms with no means of repaying the capital. Regulators are determined this pattern should not be repeated.
Accepted repayment vehicles for a second charge typically include: the sale of the property (where the borrower plans to downsize or release equity at a specific life stage); a maturing investment portfolio (ISA, stocks and shares, or investment bonds with demonstrated value sufficient to cover the debt); a pension lump sum on retirement (the tax-free cash element, subject to actuarial confirmation of projected value); or a combination of the above.
The lender will want evidence that the repayment vehicle is realistic — not merely aspirational. For property sale, they will consider age at end of term and whether downsizing is credible given your family situation. For investments, they want to see current valuations. For pension lump sums, they may require a pension forecast letter. Vague assurances that you will find a way to repay are not sufficient.
Monthly Payment Comparison: Interest Only vs Repayment
The monthly payment difference between interest only and repayment is substantial. On a £75,000 secured loan at 8% over 15 years, the repayment monthly payment would be approximately £717. The interest only payment on the same loan at the same rate would be approximately £500 per month — a saving of £217 each month. Over the term, the interest only borrower pays more in total interest because the capital is never reducing, but the monthly cash flow benefit can be significant.
For borrowers with income constraints but a clear exit strategy — for example, someone approaching retirement with a large pension pot but modest current income — the interest only structure may be the only way to make the borrowing affordable on a monthly basis. This is a legitimate and FCA-compliant reason to use interest only, provided the exit strategy is genuine and evidenced.
It is essential to understand that at the end of the term, the full original loan amount is still owed. If your repayment vehicle has not materialised as planned — investment underperformed, property sale delayed, pension smaller than expected — you face a repayment shortfall. This is a real risk and should be taken seriously when deciding whether interest only is the right structure for your circumstances.
