Remortgaging Interest-Only Mortgages

What is an interest-only mortgage?

With an interest-only mortgage, you’re only paying off the interest on your loan each month, rather than paying back the loan itself. So when your mortgage comes to an end, you’ll still have the entire loan to pay back. 

What to consider with an interest-only remortgage

Remortgaging is when you replace your current mortgage with a new one. You might remortgage for a number of reasons; to get a better deal, pay off some debts, or make home improvements. When you remortgage on an interest-only deal, you’re not making a dent in your loan - you’re only paying off the interest. At the end of the mortgage term, you’ll still have the full loan amount outstanding to pay. 

If you apply for an interest-only mortgage, you’ll need to prove to the lender that you’ll be able to pay off the lump sum at the end. Most people who have interest-only mortgages pay into some sort of investment each month so they have enough money at the end. 

Interest-only mortgages aren’t as common as repayment mortgages (where your monthly payments go towards paying off the loan and the interest). So it’s a good idea to use a specialist mortgage broker if you’re looking to remortgage on interest-only.

Some things you should bear in mind when remortgaging an interest-only deal:

• Your loan to value ratio - it might be restricted with an interest-only deal.

• Where you live - some lenders don’t offer interest-only in certain areas of the UK.

• Your choice of lenders - you’ll have fewer lenders to choose from with interest-only.

If you’re looking to remortgage your interest-only deal, it’s a good idea to work with a specialist mortgage broker who can look at your options and find the right mortgage for you. That’s where we come in! Our platform uses a clever algorithm to match you with the ideal mortgage broker for your situation. Make a quick enquiry to get started.

What are the benefits of an interest-only remortgage?

Interest-only mortgages might seem like you’re putting off the inevitable when it comes to paying back your loan. But there’s a few reasons why they could be a good option when it comes to remortgaging. 

The biggest appeal of interest-only mortgages is that your monthly payments are a lot lower than if you were on a regular repayment mortgage. 

If you’re currently on a repayment mortgage, you might be thinking about remortgaging to an interest-only deal if your circumstances have recently changed. 

If you’re self-employed with an income that varies monthly, or employed with a low income but get large annual bonuses, an interest-only mortgage could allow you the flexibility to make lower monthly payments and bigger payments when you get your commission. You’d need to make sure that your particular mortgage allows you to make overpayments without paying extra fees for doing so. This way, you could pay towards your loan and the interest on good months, and just the interest on lighter months.

Your loan to value (LTV) percentage might be more restricted with an interest-only mortgage. So you might not be able to borrow as much. Mortgage lenders will also look at how much you can afford in the same way that they would if you were applying for a repayment mortgage. 

When applying for your interest-only remortgage, you’ll need to be able to prove that you can pay off the lump sum when the mortgage comes to an end. This is called a ‘repayment strategy’. Your mortgage broker can help you present your plan in your application. 

Can I get an interest-only remortgage if I have bad credit?

Yes, you can! But it will be more difficult than if you had a perfect credit score. You might get turned down by the big banks and high street lenders, but there are specialist lenders who deal specifically with people in complex situations. 

Most specialist lenders aren’t available to you directly as a customer, so you won’t find them on comparison sites. They’re only available through specialist mortgage brokers. - like us! Make an enquiry to get started with one of our friendly Mortgage Experts.

How can I pay off the loan at the end of the mortgage term?

The downside with interest-only mortgages is that you still have the entire loan to pay off when your mortgage term comes to an end. Meaning you need to have a plan for paying it off. 

The mortgage world has changed for the better since the 2008 housing crash, and mortgage lenders are heavily regulated when it comes to giving interest-only mortgages. New requirements, brought in by the FCA, mean that you need to provide a ‘repayment strategy’ to your lender when applying for an interest-only mortgage. Put simply, you need to tell them your plan for paying off the lump sum at the end.

Different lenders have different requirements for what they’ll accept as your repayment plan. Your interest rate might also change depending on what your plans are. 

Here’s some methods for repaying your loan that could be acceptable:

• Money you’ve saved over the course of your mortgage

• Investments like stocks or shares

• The sale of another property you own

• The sale of other assets

It’s a good idea to work with a mortgage broker who can look at your options and advise the best plan for you. 

What affects my remortgage rate?

The interest you’ll pay on your new mortgage will depend on which lender you go to, along with a few other factors:

• What your loan to value (LTV) is (the ratio between the overall value of your property and how much you’re looking to borrow) - the lower your LTV percentage, the better your interest rate will be.

• What your repayment strategy is - some plans will be seen as higher risk than others. The higher the risk, the higher your rate.

• How much you earn compared to how much you want to borrow - you won’t find many lenders willing to offer you 4.5x your annual salary.

• If you have any credit issues such as CCJs or defaults - the more recent and severe they are, the harder it will be to get a good rate. 

• Other factors such as your age and the type of property you have.

Read more in our Guide: What Mortgage Lenders Look For in Mortgage Applicants

Why remortgage at all?

Your mortgage is likely your biggest financial commitment, so it makes sense to shop around for a better deal, rather than just sticking with the one you’ve got. Some homeowners can save thousands of pounds each year by remortgaging.

You might remortgage your home to reduce your monthly repayments by moving onto a better deal. Especially when interest rates are low. 

Interest rates fluctuate all the time. But when they’re particularly low, it’s a great time to remortgage and take advantage of the better interest rate. 

Getting a better deal isn’t the only reason you might want to remortgage. Here’s a few other reasons:

• Change from interest-only to repayment, and vice versa

• Release equity (a lump sum of cash) from your home to pay for improvements, a big purchase like a new car, consolidate debts, or buy a bigger share of your Shared Ownership home. 

Remortgaging can be complex because there’s more to consider than the first time round. And a lot of mortgage lenders don’t like complexity. We don’t think that’s fair. So we developed a solution. 

Get in touch to speak to one of our friendly Mortgage Experts - someone who’s up for the challenge, and has a proven track record of making remortgaging possible people just like you.