Interest-Only Remortgage

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.

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.

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:

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.

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.

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

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.