What is an interest-only remortgage?
If you decide to remortgage an interest-only mortgage, then chances are you will be able to save some money if you switch to a better interest rate. There are two usual scenarios for remortgaging an interest-only mortgage.
First is finding and switching to a better rate whilst retaining your interest-only agreement.
The alternative is switching completely from an interest-only mortgage to a repayment mortgage. Repayment mortgages are the most popular mortgages presented by lenders these days. It is worth noting that on an interest-only mortgage, you don’t make capital repayments on the amount you borrowed. Instead you are only paying off the interest. At the end of the lending term, the full amount that you initially borrowed is still payable. It is for this reason that repayment mortgages are more popular with borrowers and lenders alike.
What is a repayment mortgage?
Put simply, with a repayment mortgage you repay the amount you borrowed over a number of years. You make payments each month which are made up of capital repayment plus interest on the amount you borrowed to begin with. The beauty of a repayment mortgage is that over time, the interest will reduce and your investment in the property will increase.
Are there any advantages to an interest-only mortgage?
The benefit of an interest-only mortgage is that the repayments are significantly lower than if you had a repayment mortgage. This is attractive to many property investors.
However, whilst the lower payments may seem more attractive in the beginning, borrowers must have a plan to pay off the capital in full at the end of the lending term. This is called an investment plan/vehicle. For some people, this may involve putting the property on the market and selling up if no alternative method is available. On the other hand, some investors have the misfortune of being left with a property in negative equity at the end of the borrowing term. It may be possible to remortgage at the end of the preliminary rate period on an interest-only mortgage depending on certain criteria. Many people opt for this as it is a means of raising money by borrowing against the value of the property.
How do I repay an interest-only mortgage?
As mentioned before, an interest-only mortgage is just that, interest-only. No repayments are made on the capital. The full amount borrowed at the beginning of the mortgage term is still owed and must be paid in full at the end of the mortgage term.
Some owners, mostly investors, rely on the sale of the property to repay the outstanding capital however others use savings or investments, even the sale of another property to settle the mortgage.
Most lenders will require a repayment strategy from you as proof of how you plan to gather the funds to clear the capital at the end of the mortgage term before agreeing to an interest-only mortgage.
You will have to prove to the lender that you have a repayment vehicle in place to pay back what you owe at the end of the mortgage term. These repayment vehicles include:
- Stocks and shares ISA
- Endowment policies
- Investment bonds
- Pension schemes
- Stocks and shares
- The sale of another property
- Unit trusts
Each applicants’ circumstances are different and as a result the lender may agree on alternative arrangements to those outlined above. If you have any concerns about interest-only mortgages or have any concerns about your remortgage then please contact one of our specialist advisors who are on hand to answer any questions you may have.
Are the applications the same for interest-only remortgage and repayment remortgages?
An interest-only remortgage application is the same as a repayment mortgage application. The only dissimilarity is that with an interest-only remortgage, you have to prove to the lender that you can repay the capital. Some lenders will restrict what they lend you on a % LTV ratio. There are lenders on the market who no longer lend on an interest-only basis.
Interest-only remortgage rates
As with any mortgage application, the rates you will be offered on an interest-only remortgage will depend on a number of factors:
- Affordability and income (Lenders will take your earnings into account when making their decision)
- Credit History (Poor credit history may limit your options with some lenders)
- LTV ratio
- Repayment vehicle
- The lender
- Property Type (non-standard builds such as studio flats, or ex council builds may require a specialist lender)
Your Age, Property, etc may also have an impact on the mortgage you will be offered.
There are many comparisons for the best interest rates available online but if you would like to discuss todays current rates, make an enquiry with one of our interest rate specialists.
Switching from an interest-only to repayment mortgage
You may find that one of your repayment’s vehicles (e.g ISA, endowment) isn’t performing as well as you had expected it to. If this happens, all is not lost, you may be able to renegotiate on an existing mortgage or even switch from an interest-only to repayment.
This is very much dependent on the lender though. Granted, your monthly payments will be higher, but you will be paying off the mortgage monthly. This should lessen the lump sum you are left with at the end of the mortgage term.
You don’t have to stay with your current lender. You can easily switch if you prefer. This is the best option for some, especially if you want to make any changes to your current mortgage terms e.g. borrow more money, switch from interest-only to repayment or simply renegotiate on any of the terms of your current mortgage.
If you meet the eligibility criteria to refinance your interest-only mortgage with a new lender it might be the best option. You may qualify for a better deal than what you have with your current provider. Get in touch with us today to find out if you could be benefitting from a better deal.
Is part repayment and part interest only an option?
There are many options available to individuals on the mortgage market today and fortunately, this is one of them. It is possible to have a part repayment, part interest-only mortgage. This is known as a ‘part and part’ mortgage and is suitable for many applicants. Reason being, you will be paying off some of the mortgage and some of the interest resulting in lower repayments than if you were in a repayment only mortgage and also less of a lump sum due back to the lender at the end of the term.
Interest-only mortgages for the Over 65’s
Age is most definitely a factor in the mortgage process. However, don’t let that put you off as there are also lenders that have specialist interest-only remortgage options. Borrowing is such a large part of life now and as life expectancy increases, there are more senior clients hunting the market for interest-only deals.
If you are approaching or over the age of 65 and would like to find out if you are eligible for an interest-only remortgage, contact one of our experts who will be able to help establish the right deal for you.
What if I have been declined for an interest-only remortgage?
If your application for an interest-only remortgage has been declined or if you haven’t been able to refinance on your current mortgage, whatever the circumstances, you can always discuss your options with a member of our team who will help you find the best option available to you on the current market.