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Can I Extend My Interest-Only Mortgage Term?

By Kev TilleyCeMAP

Last Reviewed: 9th September 2021

Mortgage advisors are regularly asked general questions such as ‘Can I extend my Interest-only mortgage term?’ however, without knowing the applicant’s full personal circumstances, we cannot easily provide a simple answer.

A typical interest-only mortgage term will range between 5 and 25 years however there are mortgage products on the market providing longer repayment terms of up to 40 years depending on the applicant’s circumstances.

Lenders who offer interest-only mortgages will have their own mortgage terms and lending criteria therefore there is not a simple yes or no answer as to if a mortgage term can be extended.

There are many variables involved including; if the personal circumstances of the mortgage holder have changed during the original mortgage term and depending on if an interest-only extension period is only required in the short term, or over the longer term.

In this guide, we will explore elements that impact whether or not an interest-only mortgage term can be extended.

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Interest Only Mortgages

What is an Interest-Only Mortgage?

An interest-only mortgage is a financial product that enables borrowing to fund a property however the mortgage holder is only required to pay the interest attributable to the loan each month, during an agreed term.

Interest-only mortgage repayments are often considerably cheaper than a standard, repayment mortgage, sometimes around half the monthly cost which can make the financial product very appealing however it is worth bearing in mind that once the mortgage term is concluded, the capital loan is still due and therefore a strategy to repay this will still be required.

Interest-only mortgages are commonly used by Landlords or Property investors who will either sell the property at the end of the mortgage term or seek to refinance.

For a typical home buyer, although the lower monthly payments are attractive, the borrower would need to plan to repay the capital, either by savings or investment pay-outs to keep the property at the end of the term. Therefore, interest-only mortgages are not generally recommended unless the homeowner has significant equity and a plan to repay the capital.

Following the UK’s 2008 financial crash, the number of interest-only mortgages available on the market decreased dramatically due to the level of risks involved for the lender.

Over recent years the number of lenders offering interest-only mortgages have started to increase again, however, the levels are nowhere near the pre-financial crisis numbers.

Should you be interested in an interest-only mortgage, it is highly recommended that you approach a mortgage broker to assist as brokers have access to the whole market to best placed to locate the best deal available.

How can I pay off my outstanding interest-only debt?

The easiest way to pay off outstanding debt is to sell your property and use the proceeds from the sale to pay off the outstanding balance.

Although, for many homeowners, this is not feasible since they will have paid a small deposit and so be in negative equity, meaning that the property sale will not raise enough money to pay off the mortgage.

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What Terms are Commonly Available for Interest-Only Mortgages?

Residential interest-only mortgage lenders will have strict criteria, which often means that interest-only mortgages are not commonly available to first-time buyers, as the loan to value rate is often capped at 50%, therefore large deposits are needed.

While some lenders restrict their offering of interest-only mortgages only to high-income earners, earning over £100,000 a year.

Lenders will also need to know the repayment strategy for the capital at the end of the mortgage term.

Interest-only, buy-to-let mortgages are more widely available however are specifically designed for investors to finance a property to let out, and not live within it.

Can Interest-Only Mortgages be Obtained for the Short-term?

Interest-only mortgages are available on a short-term basis in some circumstances, for example, should an applicant know that a lump sum from investments will be available within a set timeframe to settle the capital.

The costs of an interest-only short-term mortgage should be compared with other types of short-term borrowing such as bridging loans, before committing.

As we have discussed, the lenders set their criteria and therefore for further advice on which lenders offer short term interest-only mortgages can be sought from specialist brokers who often have access to the entire financial market and can therefore provide a range of quotes.

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Mortgage extensions – Can I extend my mortgage terms instead?

Some mortgage lenders may consider extending the term on an interest-only mortgage however it is not guaranteed. There may be the option of switching to an interest-only mortgage with another lender however this would depend on the personal circumstances of the applicant and whether they can meet the lending criteria available.

If a mortgage term extension cannot be obtained, other options may be available such as other borrowing methods including switching to a standard repayment mortgage or bridging loan, paying off the mortgage (if this is an option), or selling the property.

If you are considering extending your mortgage term or switching financial products, it would be worth discussing your options with a mortgage broker, to obtain expert advice as well as compare deals available.

Eligibility Criteria for an Extension to an Interest-Only Mortgage Term

As discussed earlier, the lending criteria for interest-only mortgages is quite strict and there are a streamlined number of lenders offering interest-only mortgages. There are many variables that would impact a lender’s decision on whether to extend the mortgage term on an interest-only mortgage including, the age of the applicant, their personal circumstances and if the applicant still meets the lending criteria.

One element that will likely impact a lender’s decision is if the proposed extension would extend into the applicant’s retirement, as affordability often is a concern to lenders.

Before approaching your current lender or applying to another lender it’s highly recommended to seek expert advice to review all of the circumstances and propose options.

What about Remortgaging?

You could opt to remortgage your property, which in some cases can reduce the interest amounts, allowing you to pay more of the capital component of your mortgage off.

However, bear in mind that if you do want to remortgage, you will need to go through the mortgage application process, meaning things like your outgoings and affordability will be reviewed.

Extending Your Mortgage Terms Summary

Interest-only mortgages can be obtained, both in the short-term and over the long term depending on the personal circumstances of the mortgage applicant.

A repayment method is required to cover the capital at the end of the mortgage term and the lender would require details of the repayment strategy upon application.

Interest-only mortgages are harder to come by compared with before the financial crisis due to the level of risks involved for the lenders, however, they do serve a purpose in certain situations.

Should you be considering an Interest-only mortgage, contact our friendly team to book an initial consultation to review if this option is the most suitable and cost-effective for your requirements.

Call us today on 01925 906 210 or feel free to contact us. One of our advisors will be happy to talk through all of your options with you.

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