What To Consider If You Are Thinking About An Interest Only Remortgage
On an interest only mortgage, your monthly repayments won’t pay back any of the original loan, they will only cover the interest due on it. This means that at the end of the mortgage term you will need to pay back the full amount of the original loan as a lump sum.
Lenders will need proof of your ability to pay the lump sum at the end of the term before they will approve an interest only mortgage.
As with any type of mortgage, the interest rate payable is important. If you are in a fixed deal it is generally a good idea to look at remortgaging and having a new deal in place at the end of your current deal. Suddenly being switched from your fixed deal rate to a lender’s standard variable rate (SVR) may make more of a difference to your monthly payments than on a repayment mortgage.
Some lenders won’t offer interest only remortgage deals in certain parts of the UK.
The loan to value percentage (LTV), or how much of the value of your property you can borrow may be restricted to 75% of the property’s value with many lenders but this does vary.
Some lenders will not lend on an interest only basis, meaning that the number of deals for interest only mortgages is more limited than those available for repayment mortgages.
Our team of local independent advisers have access to thousands of deals across the market, both interest only and repayment. They can guide you on what you need to consider if you are thinking about remortgaging on an interest only basis.
What Are The Potential Benefits of an Interest Only Mortgage?
There are a number of reasons you may choose an interest only mortgage when you are considering remortgaging.
- Being able to afford a larger or better property
You may be able to afford a more substantial property or one in a better area where homes would usually cost more than you might otherwise be able to afford on a repayment mortgage. As an interest only mortgage will generally have a lower monthly repayment rate when compared to a repayment mortgage for the same amount, it may be possible for you to get a larger loan and still afford the monthly repayments.
- Short term purchases
If you know that the property will need to be sold before the mortgage term has come to an end and therefore the capital sum will be repaid through the sale, you could benefit from lower monthly payments in the interim.
- Initial affordability
This may be an option if your personal circumstances have changed in the short term and you have confidence that you will be able to deal with larger payments in later years but can’t afford a repayment mortgage now.
- Lower monthly payments
If you need lower monthly mortgage payments because your current commitments take up a lot of your disposable income, this may be an option for you. Perhaps you have school fees to pay or need to pay for professional training. Or there may be other commitments that require a significant proportion of your income at the moment, but you know this will likely only be for a few years.
- Having more money available for investments
If you are confident that you can get a significantly higher rate of return by investing the money elsewhere, you may want to take an interest only remortgage so that you have extra income to invest. However, this can be a risky option and you would need to be confident that this would be in your best interests.
Eligibility For An Interest Only Remortgage
Regardless as to the rate that may be available, you will still need to be eligible from a lender’s perspective. Your circumstances may have changed since you took out your original mortgage. This might even be the reason why you are considering remortgaging on an interest only basis.
Loan to value (LTV) percentages can be more restrictive and there may be fewer options on the market than for repayment mortgages. However, eligibility criteria for lenders are likely to be broadly similar to those for repayment mortgages. As we mentioned above, there is one key difference; For an interest only remortgage, you will need to be able to prove your ability to pay off the lump sum at the end of the term to the lender’s satisfaction. This is known as the repayment strategy. Whilst all lenders will require that you have a repayment strategy, the criteria for this will differ between lenders.
Even if your circumstances have changed, you may still be able to take out an interest only remortgage. There are specialist lenders that will lend to those that have bad credit or have only been self-employed for a short period of time and therefore don’t have three years’ worth of accounts, for example. Our independent advisers can work with you to determine what your eligibility is likely to be and to find lenders that may offer solutions that will work for you.
How Can You Pay Off Your Loan At The End of The Term?
With an interest only mortgage you will still owe the original sum you borrowed when the mortgage term ends. This means that you must have a way to pay this off. Lenders will normally require evidence of this when you take out an interest only mortgage.
New regulatory requirements were brought in under the Financial Conduct Authority’s Mortgage Market Review which state that there must be a credible strategy for repayment for lenders to provide interest-only mortgages. This was brought in to protect borrowers from the possibility of completing their mortgage term without being able to pay off the amount borrowed and potentially having to sell their home as the only way to raise the money.
The requirements will vary from lender to lender and the rates available to you may depend on the type of repayment vehicle you are able to offer them. As a guide, the following may be considered acceptable repayment vehicles although all lenders will have their own criteria.
- Endowment policies
- Stocks and shares or a stocks and shares ISA
- Investment bonds
- Pension schemes
- Unit trusts
- The sale of the property being remortgaged, (assuming it is not your main home)
- The sale of another property
- The sale of other assets
Our advisors can discuss the requirements of various lenders with you and the options available to you where you live.
Rates For Interest Only Remortgages
The rates available will vary according to each lender and will depend on a number of factors.
- Your loan to value (LTV) ratio. The lower the percentage of the overall property value you are seeking to remortgage, the better the potential rate.
- The type of repayment vehicle. Some repayment vehicles will be considered higher risk than others. This will vary from lender to lender. Repayment vehicles considered lower risk are likely to mean better rates.
- Your income, employment status and how much you want to borrow. Most lenders will not want to offer more than 4x your income, so if you need a larger loan there will be fewer options.
- Your credit history. If you have recent credit rating issues and / or they are significant, the lower rates may not be available to you.
Interest Only Remortgages For Buy To Let Landlords
Interest only mortgages are quite common in the buy to let market. Buy to let landlords will hope that the income they receive from the property will be more than the mortgage payment. This allows them to own the property whilst making lower mortgage payments and potentially frees up income for them to use elsewhere. As the property isn’t their main home, the potential of having to sell it in order to pay off the capital amount at the end of the term is less of an issue than if it was their principal residence.
However, the rates for buy to let mortgages tend to be higher than those for residential purchases. From a lender’s perspective, this is because there is more risk associated with a buy to let mortgage. If tenants don’t pay their rent and the landlord doesn’t have other funds available, they could default on the loan.
Some lenders do offer favourable rates. If you are looking for an interest only buy to let mortgage our expert advisors can work with you to review the market and find an appropriate product.
Flexibility When Remortgaging With An Interest Only Deal
Because interest only mortgages have a different structure which results in lower monthly payments, they can be particularly suitable for some borrowers. If your circumstances have changed since you took out your original mortgage, it may be that it would now suit you better to have lower monthly repayments but to be able to pay off large lump sums towards the capital balance periodically. There are interest only mortgages that will enable you to do this without penalties. If you fall into one of the following categories it might be worth considering remortgaging to an interest only mortgage as it will allow you to effectively tailor your payments to suit your circumstances on a month to month basis.
If your monthly income is low but you regularly get large annual bonuses. Some employment is weighed heavily towards annual performance. Whilst bonuses are not always guaranteed, if you have confidence that your income will be structured this way, remortgaging to an interest only deal would allow you to make large repayments annually to ensure that the capital balance is being reduced whilst giving you the flexibility of being able to make lower payments on a monthly basis.
If your income is largely based on commission so that you get significantly more in some months than in others. If a large percentage of your income is commission-based it can be difficult to be able to guarantee large mortgage payments every month, particularly if your work is seasonal. Remortgaging to an interest only option that allows overpayments without penalty would enable you to reduce the capital balance in good months and pay the reduced interest only amount in lighter months.
If you are self-employed and your income can vary from month to month. Remortgaging to an interest only mortgage could give you the flexibility to make larger payments in the months when your finances are in better shape.
If you have questions and would like to speak to an expert for independent advice regarding the interest only remortgaging options that may be available to you, please call The Mortgage Hut today on 0300 303 2640 or make an enquiry here on our site.