Interest Only Remortgage

If you want 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.

An interest only remortgage is when you remortgage your existing mortgage on to an interest only deal. This means an interest only mortgage replaces whatever deal you originally had (whether your existing deal was interest only or repayment). 

With interest only mortgages, you don’t make any capital repayments on the actual loan - you simply pay the interest. The full loan amount becomes repayable when the mortgage term ends, so you’ll need to have a robust strategy (otherwise referred to as a repayment vehicle) in place to settle the remaining debt. 

Alternatively, repayment mortgages require you to repay both the capital you’ve borrowed and the interest, typically over 25 - 35 years. With this type of mortgage, your monthly payments consist of a combination of capital repayments and interest on the full loan amount. Over time, the interest you pay will reduce - a process known as “amortisation” - while your capital repayments will gradually increase. 

Monthly repayments are generally lower with interest only mortgages compared to repayment mortgages, which makes them particularly appealing to property investors.

The length of time you can remain on an interest only mortgage depends on the terms agreed upon when you first applied. While mortgage products typically last between 2 and 5 years, the overall mortgage term could be up to 25 years. This means that when your initial deal ends, you have several options: you can either arrange a product transfer with your current lender, remortgage to a new deal, or repay the mortgage early if you have the funds available. 

Many homeowners wonder whether they can continue remortgaging indefinitely. While this is possible in some cases, it depends on your personal circumstances and the lender’s criteria at the time. Lenders will require a clear repayment strategy - such as savings, investments, or the sale of the property, before approving a new interest only mortgage. Age can also be a factor, as some lenders impose maximum age limits on borrowing. If you intend to remain on an interest only mortgage long term, it is important to regularly review your financial position and available options with a mortgage broker to ensure you have a realistic plan for repaying the loan when the time comes.

Whether switching to an interest only mortgage is a good idea depends on your financial situation, future plans, and ability to repay the loan.  

One of the main advantages is the lower monthly payments, as you’re only covering the interest rather than repaying the capital. This can free up extra cash for other expenses, investments, or even overpayments if allowed by your lender. It can also be useful for those who expect their financial situation to improve in the future, allowing them to manage their outgoings in the short term. 

However, there are also significant risks. Since you’re not reducing the loan balance, you’ll need a clear repayment strategy for the end of the mortgage term. This could involve savings, investments, or selling the property, but if these plans do not materialise, you could be left struggling to repay the debt. Interest only mortgages are also harder to qualify for, as lenders typically require higher deposits, strong affordability assessments and a realistic repayment plan. Additionally, while monthly payments may be lower, you could end up paying more interest overall compared to a repayment mortgage. 

Switching to an interest only mortgage can work well in certain situations, but it’s not suitable for everyone. Speaking to a mortgage broker is the simplest way to make sure you’re making the right decision for your circumstances.

Yes, when you take out an interest only mortgage, you’re still the legal owner of the property. The key difference compared to a repayment mortgage is that you’re only paying the interest each month, meaning the capital loan amount remains unchanged throughout the mortgage term. While you have full ownership rights, the lender holds a charge against the property, which means they have the right to repossess it if you fail to meet your mortgage payments. 

Some people mistakenly believe that an interest only mortgage is similar to renting, but this is not the case. Unlike renting, you can make alterations to the property, sell it when you choose and potentially benefit from any increase in its value over time. However, since you’re not gradually paying down the loan, you’ll need a clear plan to repay the outstanding balance when the mortgage term ends.

Your age, income, and credit score can all influence your likelihood of being accepted for an interest only remortgage. Many applicants are turned down for an interest only remortgage due to the following factors:

When you take out an interest only mortgage, you don’t make any capital repayments on the loan - you only pay the interest. The full loan amount must be repaid at the end of the mortgage term, and lenders will expect you to demonstrate that you have a robust strategy in place to settle the debt. 

Some people rely on selling the property to release equity and repay the capital, while others use a repayment vehicle such as investments, savings, stocks and shares, endowments, or the proceeds from the sale of another property.

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.

Yes, you can sell your house if you have an interest only mortgage. As the legal owner of the property, you have the right to sell at any time, just as you would with a repayment mortgage. When the property is sold, the proceeds will first be used to repay the outstanding mortgage balance in full. Since you have only been paying the interest and not reducing the loan amount, the full capital debt will still be owed to the lender at the time of sale. 

If the property has increased in value, you may be able to repay the mortgage and still have funds left over. However, if house prices have fallen, there’s a risk that the sale price may not be enough to clear the outstanding balance, leaving you responsible for any shortfall. In some cases, ERCs (early repayment charges), depending on the terms of your mortgage deal. 

Before selling, it’s a good idea to check your mortgage agreement for any restrictions or fees.

It is possible to use the sale of your home as the repayment vehicle for your interest only mortgage. However, you’ll likely find the pool of lenders you have access to when arranging your interest only mortgage is smaller. Also, the lenders that will consider selling your house to repay your interest only mortgage may stipulate certain caveats, such as requiring that you have a minimum amount of equity in the property at the point of sale.

The process of applying for an interest only remortgage is the same as applying for a standard remortgage. However, you’ll need to provide evidence to the mortgage provider that you have a sufficient repayment vehicle in place to repay the capital at the end of the term – e.g. sale of another property, stocks and shares, investment bonds, etc. 

Many lenders restrict interest only mortgages to a maximum of 75% LTV (loan to value), while others may require as much as 50% LTV. Some lenders don’t offer interest only mortgages at all, so it’s important to research your options carefully and consult a mortgage broker like John Charcol. 

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 LTV 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 exit 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 the best possible price 
• Finding the necessary funds elsewhere 
• Remortgaging your interest only mortgage on to a repayment mortgage 
• Moving part of your mortgage to a repayment plan while keeping the rest interest only; this is known as a “part-and-part mortgage” 

If you feel trapped in your interest only mortgage and want to switch, speak to one of our expert advisers at John Charcol for guidance. 

While there are many advantages to interest only mortgages, it’s important to understand if they’re the right option for you. To find out more about interest only remortgages and explore the options available, contact John Charcol. Our team of experienced advisers can recommend a range of remortgage solutions tailored to your needs.

Give us a call today on 0330 433 2927.