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I am looking into interest-only mortgages. Why is the property which you are buying with the mortgage not considered a repayment vehicle? Selling the property would be enough to pay back the mortgage. Is it because the property value could decrease?

I was looking at this article, ways-of-repaying-an-interest-only-mortgage

Examples of repayment vehicles:

  • Cash saved in a savings account or ISA (although some lenders are no longer accepting this as a repayment vehicle)
  • Stocks and shares ISAs
  • Pensions
  • Investment bonds
  • Shares
  • Unit trusts
  • Regular savings plans (endowment policies)
  • Other properties or assets
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  • Does the mention of ISA mean this is a United Kingdom related question? Dec 21 '20 at 12:39
  • OP's profile does state UK, but the question seemed general enough that I don't think that adding it to tags is important. Dec 21 '20 at 12:43
  • Income is not considered?
    – Pete B.
    Dec 21 '20 at 14:23
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    Interest-only loans were a huge factor in the crash of 2009, and people who took IO loans got decimated, because they were usually abusing the IO loan to buy more house than they could really afford, with less "down" than is prudent. Their only "backup plan" was lines of credit, which disappeared too. Dec 22 '20 at 0:06
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The lender wants their money back. And they want to be certain they get their money back on a fixed schedule.

Having you repay the loan "when you sell it" is not good enough. They need to know that in some fixed time you will definitely be able to pay the loan back. Theoretically they could make you a loan in which you are forced to sell the home after 25 years, but probably nobody would take such a loan, and there might be legal difficulties in enforcing it.

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  • Actually, balloon mortgages have that effect, no? Pay up, via another mortgage or source of funds or sell. Dec 21 '20 at 16:44
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The examples are aimed at someone who wished to stay in their home. That would be the case whether it was a standard mortgage or interest-only. The home's value can't be used to pay off the mortgage without being sold, so the article is just listing how one would raise money to pay it off but stay in the house.

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  • Yes the context would be for someone to stay in their own home. The examples were taken from: moneyadviceservice.org.uk/en/articles/…
    – Hughes
    Dec 21 '20 at 12:41
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    Thanks for the link. I think that solves it. The home's value can't be used to pay off the mortgage without being sold, so the article is just listing how one would raise money to pay it off but stay in the house. Dec 21 '20 at 12:45
  • Right, that makes sense. So the value of the house could be used as a repayment vehicle if it were an investment property?
    – Hughes
    Dec 21 '20 at 12:48
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    No difference. If you own an investment property, you'll always have the option to sell it and use those funds towards repaying any loan on it. But as with the home you live in, you would no longer have the property. Dec 21 '20 at 12:50

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