If your existing mortgage deal is coming to an end, you should think about remortgaging before you fall onto your lender’s standard variable rate (SVR). As most mortgages will have cheaper rates of interest than your lender’s SVR, your monthly payments will be lower on a new deal.
As is the case when you took out your original mortgage, you have two choices when looking for a new deal. You can remortgage onto a repayment mortgage, where you pay back the loan capital and interest over the mortgage term, or you can remortgage onto an interest-only mortgage.
In this guide, we will take a closer look at interest-only mortgages.
What is an interest-only remortgage?
An interest-only mortgage is quite different to a repayment mortgage. Rather than paying back both the loan capital and interest each month, your monthly payments only consist of the mortgage interest rather than any of the capital borrowed.
As such, the repayments on your mortgage will be significantly less if you decide on this type of mortgage. However, you will need to pay back the loan capital as a lump sum at the end of the term.
Related reading: The Different Types of Mortgages Explained
Interest Only Remortgage: Things to consider
Before remortgaging onto this type of deal it is wise to consider the following.
How are you going to repay the loan capital?
The biggest thing you need to consider is your ability to repay the loan capital at the end of the term. If you don’t have the funds available when your mortgage term ends, your home may be repossessed. In some cases, you may be allowed an extension on your mortgage, but this isn’t guaranteed.
Therefore, be sure to have a repayment strategy in place before you take out an interest-only mortgage. Your lender will want to see proof of this strategy anyway so you will need to consider how you are going to repay the capital before you make your mortgage application.
Which lender will you choose?
Not all lenders provide interest-only mortgages so your options may be limited. Of those that do, you want to find the lender that will give you the best deal for somebody in your financial situation.
Searching the market for the appropriate lender can be time-consuming but that is where we come in. At YesCanDo Money, our mortgage experts have access to thousands of deals across the whole mortgage market and can help you save money by finding you the best mortgage deal and the most appropriate lender.
Remortgage to interest only
It’s our opinion that the best time to remortgage is usually at the end of a fixed rate this way avoiding any early repayment charges. It is also a good time to work out if an interest-only mortgage could be suited to you. The bottom line is most banks and building societies do not like interest-only mortgages however there are a few that do offer this and could be worth considering if it suits your situation.
Interest Only Mortgage Benefits
There are a number of reasons why you might want to choose an interest-only mortgage over a capital repayment mortgage.
Lower monthly repayments
If you can’t afford to make the monthly payments on a repayment mortgage or if you want to reduce your monthly outgoings, an interest-only mortgage can be attractive because of the lower monthly mortgage payments.
You can afford a more expensive property
As your payments will be smaller, you may be able to afford a more expensive property. This could be ideal if you want to move to a more affluent neighbourhood or if you want to buy a larger home for you and your family.
You can make a short-term purchase
If you’re not at the stage where you want to buy your ‘forever home,’ you can buy a house with the intention of selling it at the end of the mortgage term. The money you raise from the sale of the house can pay off the capital loan amount and give you the freedom to move onto another interest-only mortgage or a repayment mortgage.
You will have time to save
As mentioned, you will need to pay back the capital at the end of the term. This will be a sizeable amount but as your monthly payments will be smaller on an interest-only mortgage, you may be in a better position to save up for the final lump sum. You could also invest this surplus money to raise the funds for the capital payment.
Can I remortgage on interest-only?
Provided you meet the lender’s criteria and you have the ability to cover both the monthly repayments and the final capital repayment at the end of the term, you should be allowed to remortgage.
Your existing lender might be able to give you a good interest-only deal but it’s still worth comparing other deals on the market as you may get a better deal by switching to a new mortgage lender. Use a mortgage calculator and speak to our team if you want to compare mortgage offers.
But even if you are allowed to remortgage to an interest-only mortgage, it is still worth considering repayment mortgages too.
Eligibility For An Interest Only Remortgage
The eligibility criteria for interest-only mortgages are very similar to that for repayment mortgages but there is one key difference: you will need to have a repayment strategy in place to prove your ability to pay the final lump sum. If the lender is happy with your chosen repayment plan, you may be eligible for their interest-only mortgages if you meet the rest of their criteria.
Other factors that can affect your eligibility include:
- your credit score
- your income
- your employment status
- your age
- your loan to value
Some lenders will deny your application if you have a bad credit history, are self-employed, or are over a certain age. However, there are lots of specialist lenders on the market that will still consider you for a mortgage so if you don’t meet the criteria for a mainstream lender, we can find a solution for you.
Most lenders will only consider an interest-only mortgage if you have a low loan-to-value LTV (under 60%) and if you earn an above-average income. We are aware this is quite broad therefore talk to one of our mortgage advisers that can give you the different lender underwriting criteria.
How to pay off an Interest Only Mortgage
As we have mentioned multiple times now, you will need to have a mortgage repayment plan in place to satisfy your potential mortgage lender.
The Financial Conduct Authority has insisted on this to ensure mortgage lenders don’t lend money without checking for proof of repayment first. This is in the best interest of both borrowers and lenders as it alleviates the financial risk for both parties.
The repayment requirements vary between lenders but as a rough guide, these are some of the repayment vehicles that lenders will typically accept.
- Savings accounts
- Pension schemes
- Investment bonds
- Endowment policies
- Stocks and shares
- The sale of another property
- The sale of other assets
- Another remortgage
Our mortgage advisers can give you further advice about how to repay an interest-only mortgage so get in touch with our team to learn more about repayment vehicles and the specific lenders that will accept your proposed repayment plan.
Interest-only Mortgage Interest Rates
The mortgage interest rate offered on an interest-only deal will depend on a number of factors. These include:
The loan-to-value ratio
The lower the loan-to-value ratio (the size of the loan relative to the total value of your property) the better the potential mortgage rate.
Your repayment vehicle
Some repayment vehicles are considered to be a higher risk than others, so it’s worth choosing a lower-risk repayment vehicle if you want to benefit from lower rates of interest. Different lenders will have different views of risk but we can put you in touch with the lender that is right for your personal circumstances.
Your credit history
Bad credit history doesn’t automatically rule you out of a mortgage but if you have had recent credit issues, you will likely be ruled out of the cheapest mortgage interest rates.
Other factors affecting the mortgage rate you will be offered include:
- The amount you want to borrow
- Your age
- The location of your property
- The property type
- The mortgage lender you choose
To benefit from the lowest rates of interest, speak to one of our mortgage brokers as we have up-to-date information on the cheapest deals on the market.
Buy-to-let interest-only mortgage
Most mortgage lenders are willing to offer interest-only mortgages on buy-to-let properties than residential properties so you will have a wider choice of mortgage deals.
The extra money you can save on an interest-only deal can go towards your final payment as can the money you earn from your rental income. As you aren’t living in the property, you also have the option of selling it at the end of the mortgage term so you could use the money from the sale to pay off the final amount.
Because of the risk factor associated with buy-to-let properties, many lenders will charge you higher interest. If you aren’t able to keep up mortgage repayments, perhaps because of a shortfall in tenants or because an existing tenant refuses to pay rent, you could default on your loan, hence the perceived risk by lenders.
Some lenders do offer competitive rates of interest, however, so if you are a landlord, we can put you in touch with the lenders that will offer you the best interest-only remortgage deals.
Alternatively, you might want to consider repayment mortgages instead. Your payments will be higher but the interest will be less so you can still make savings on your mortgage. As you pay both capital and part interest each month, your mortgage will also be cleared in full at the end of its term.
How YesCanDo can help with your interest-only mortgage
If you’re currently considering interest-only remortgages, get in touch with our expert team for qualified mortgage advice.
Our mortgage team has helped many interest-only customers over the years, so no matter your personal circumstances, we will be able to support you.
A member of our team will assess your finances and your repayment plan and will let you know if an interest-only mortgage is right for your situation.
If an interest-only mortgage is right for you, we will search the market for the best interest-rate deal to help you save money throughout the duration of your mortgage term.
Get in touch
To learn more, get in touch with us about a mortgage online to arrange your first consultation. We will then look at interest-only remortgages with you and complete your application on your behalf when we have found you the perfect deal. And as all of our services are FEE-FREE, you won’t have to pay us a penny if you decide to come to us for mortgage advice and support.
Frequently asked questions
Yes, most lenders will allow you to do this but you need to remember that you will be subjected to their early repayment charges.
The deposit size will depend on the lender. But it’s important to note that if you’re looking to take out a mortgage on an interest-only basis, the deposit will be larger than that required for a repayment mortgage. This could be between 25%-40% of the property value or possibly more.
If you’re worried that you won’t be able to keep up repayments on a repayment mortgage, you can benefit from cheaper monthly payments on an interest-only remortgage. This is because you pay just the interest and not the capital on your payments. However, interest charges are higher than those on a repayment mortgage so you will pay more money overall.