If you’re wanting to remortgage your property to reduce your monthly payments, an interest-only mortgage may be appealing. With this kind of mortgage, you’re only required to pay back the interest on the mortgage during the term of the loan. This could see your monthly mortgage repayments drop significantly compared to that of a repayment mortgage, where your monthly repayments are part capital and part interest payment.
However, before you decide that a remortgaging to an interest-only mortgage is right for you, there are some important things you need to consider.
The Topics Covered in this Article Are Listed Below:
- What Is an Interest-Only Remortgage?
What is an Interest-Only Remortgage?
When you remortgage your interest-only mortgage, you can expect to either keep your interest-only arrangement but move to a more beneficial interest rate or change from an interest-only to a repayment mortgage. You’ll not make any capital repayment on the actual loan with interest-only mortgages but just pay the interest. The full amount is then repayable when the loan term ends, and you should have a solid strategy to settle the remaining debt.
Alternatively, repayment mortgages require you to repay what you've borrowed, typically over 25 to 35 years. With this type of mortgage, the monthly payments comprise a small capital repayment and interest across the full loan amount. The interest you’re paying will reduce over time (known as ‘amortisation’), while your capital repayment will rise.
The monthly repayments are considerably lower than a repayment mortgage, which makes interest-only mortgages particularly appealing to property investors.
What Are the Eligibility Criteria for an Interest-Only Remortgage?
Your age, income, and credit score can all have a bearing on your likelihood to be accepted for an interest-only remortgage or mortgage. Many potential borrowers get turned down for an interest-only remortgage because of:
- Affordability – lenders will take into account your earnings when considering your eligibility. Some lenders have strict minimum income requirements for single and joint applicants, typically between £50,000 and £100,000. However, many specialist lenders will accept a lower income, and some providers will consider self-employed applicants
- Self-employed – the range of interest-free mortgage deals available to self-employed borrowers is the same for employed applicants. However, you’ll generally be expected to provide 3 years' worth of accounts. If you haven't been trading long enough, there are specialist lenders who may be able to help instead
- Bad credit history – a poor credit history that includes CCJs, IVAs, and bankruptcy can mean that the number of interest-only mortgage deals available to you is limited. There are also adverse credit mortgage lenders who will consider interest-only deals for those with bad credit
- Type of property – if you’re searching for an interest-only remortgage on a non-standard property such as an ex-council house or studio flat, your options may be limited and require a specialist lender.
How to Repay an Interest-Only Remortgage
Taking out an interest-only mortgage, you don't make any capital repayments on the loan. You only pay the interest. The full amount is to be repaid at the end of the term, and lenders will expect you to demonstrate that you have a good strategy in place to pay it off. Some people rely on selling the property to release equity and repay the capital. In contrast, others use a repayment vehicle such as investments, savings, stock and shares, endowments, or another property's sale.
Approved Interest-Only Repayment Vehicles
If you’re considering an interest-only mortgage or remortgage, you must demonstrate to the lender that you have an appropriate repayment vehicle set up. Most UK mortgage lenders will accept one of the following repayment vehicles:
- Sale of another property
- Unit trusts
- Endowment policies
- Pension schemes
- Stocks and shares
- Investment bonds
- Stocks and shares ISA
Some specialist mortgage providers may agree to other options depending on the borrower's circumstances.
How to Avoid Paying More Interest Than Necessary
When looking at what interest-only mortgage deals are available, you must stay on top of the market. To ensure you don't pay more interest than you should, it's a good idea to refinance onto a new deal when your initial rate period ends. This will prevent the mortgage from automatically switching to the mortgage lender's standard variable rate, which is typically much higher.
How to Apply for an Interest-Only Remortgage
The process of applying for an interest-only remortgage is the same as applying for a standard remortgage. However, you must prove to the mortgage provider that you have a sufficient repayment plan prepared to repay the capital. Many lenders restrict the loan to 75% loan-to-value (LTV), while others require as much as 50% LTV. Some lenders will not lend on an interest-only basis at all.
Remortgage Rates for Interest-Only Deals
The interest-only remortgage rates that lenders offer will vary and depend on a range of factors such as age, property type, location, and construction. Other issues lenders consider will include:
- The type of repayment vehicle – the more common the repayment vehicle, the more mortgage lenders there'll be to choose from
- The loan-to-value ratio – the more equity in your home, the better the remortgage rate
- Income and affordability: Most mortgage lenders offer around four times a borrower's income
- Credit history – any recent or severe credit issues lead to a higher rate
How Can I Get Out of an Interest-Only Mortgage?
If your mortgage is interest-only, but you have little or no equity in your home and want to get out of your interest-only mortgage, you could consider:
- Negotiating a new deal with your mortgage lender before the end of the term
- Selling the property for as best price as possible
- Find the funds elsewhere
- Move the entire mortgage to a repayment mortgage
- Move a portion of your mortgage to a repayment mortgage while the rest remains interest-only (referred to as a ‘Part-and-Part mortgage’)
If you feel trapped in your interest-only remortgage and want to switch, speak to one of our expert advisers at John Charcol for advice. There are many advantages to interest-only mortgages. To find out more about whether interest-only remortgages are right for you and what options are available, contact John Charcol. Our team of experienced advisers can recommend a range of remortgage options to suit you. Give us a call today on 0330 433 2927.
Compare the latest remortgage rates and deals with our comparison tool and discover how this type of mortgage works, the process and if it’s suitable for you.
9 Reasons to Remortgage
Read our nine reasons why you should consider remortgaging your home. You can save a lot of money on remortgaging, so make sure you get the best deal.
Remortgaging means to switch to a new deal with a different lender but stay in the same property. Learn about remortgage costs, valuations and see our advice.
Here you’ll find our free remortgage calculator which helps you work out how much you could potentially save each month if you remortgaged onto a new rate.
How to Find the Best Remortgage Rates and...
Learn how to find the best remortgage rates & remortgage deals here. We go through what to consider when comparing deals, which lenders there are & more.
How Much Can I Borrow on a Remortgage?
Find out how much you could borrow on a remortgage in our guide. We go through how lenders determine what to lend you, how LTVs work and more.
When NOT to Remortgage
Not sure whether now’s the time to remortgage? Find answers to all your remortgage questions.
Try our interest-only calculator to work out how much your monthly interest payments will be based on what you want to borrow and your mortgage rate.
On this page you’ll find our detailed mortgage terminology glossary. There’s a lot of jargon out there but we’re here to make it easy.
There are many valid reasons to remortgage. If you’re considering remortgaging your home but need help finding the right option for you, contact John Charcol. Our team of experienced mortgage advisers can recommend a range of remortgage options to suit you. Request a call back or call us on 0330 433 2927 to get in touch.
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