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Interest only remortgages

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 5, 2023

Interest-only remortgage guide – How to remortgage if you are on an interest-only mortgage currently

Although interest-only mortgages are rare for residential borrowing, they are often used to buy to let properties. What do you do if your fixed-term mortgage or interest-only deal ends?

We’ll be looking at the options available to you when it comes refinancing an interest only mortgage and what you can do to get the best deal.

As we’re a tech heavy (and slick company) you can apply online to remortgage below:

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What is an interest-only mortgage?

An interest-only mortgage allows you to switch to a better rate with your current lender or to move to a lender that offers a better deal. You can keep your existing interest-only arrangement or switch to capital and repayment methods with the remortgage.

A interest-only remortgage refers to an interest-only mortgage you take out after taking out an earlier interest-only loan.

To avoid being moved onto the Standard Variable Rate (SVR) by the lender, borrowers often transfer their mortgages at the end of a fixed rate period. This can lead to higher repayments. To save money, you can lock in a new interest-only mortgage if you’re already on an SVR.

If your property has increased in value, it may be a good idea to remortgage with an interest-only deal. This allows you to get a lower loan value (LTV), and a lower interest rate.

To qualify for a lower LTV at remortgage, borrowers who have a lump-sum loan could also be able to pay off some capital.

A remortgage is a way to release more cash from your property.

For higher-value transactions, wealthy borrowers and investors who own property, interest-only remortgages may be more available.

As we’re a tech heavy (and slick company) you can apply online to remortgage below:

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Can you remortgage an interest-only mortgage?

Yes, in short. Lenders will accept a simple remortgage with the same interest-only terms. Most lenders will offer you a new deal if your current lender is willing to consider it. It’s worth looking at the market for better deals, as you may find a better deal by switching lenders.

Also, consider the terms of repayment. To make monthly payments more manageable, interest-only mortgages can be taken out.

However, if your property’s value has increased, your loan-to-value ratio will be lower, and you may be able to get a lower rate.

You may also have changed your personal circumstances. A repayment mortgage may be possible if you have experienced a rise in your income or paid off other debts.

A broker can help you evaluate all options and compare monthly and overall borrowing costs.

Are you able to release equity?

You have many options when it comes to lenders and products. A repayment mortgage may offer you more options, so you might be able get a better deal.

A part-and-half mortgage is a way to remortgage your home and unlock equity without having to increase your monthly payments. This hybrid mortgage offers both interest-only and repayment options.

How to find the best deal

Finding the lowest monthly payment is not the only way to get the best mortgage deal. You should consider your total borrowing costs, and if you have an interest-only mortgage, review the status of your repayment mechanism.

Talking about your long, medium and short-term plans is an integral part of remortgaging. These may impact the deal you choose. If you have plans to improve your home shortly, it might be a better idea to extend your loan than to apply for a secured loan one year later.

Talking to a broker specialising in remortgages is the best way to find the right deal for your needs and plans. They can help you understand all the options and give you all the facts before making your final decision.

As we’re a tech-heavy (and slick company) you can apply online to remortgage below:

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Alternatives to Remortgaging

You will be required to repay any interest-only mortgages nearing the end of their term. Don’t worry if your current repayment arrangement isn’t sufficient to pay the balance. There are other options, such as remortgaging.

  • Equity release: If you are over 55, you may be eligible to take out an equity transfer product. This could help you pay off your mortgage and possibly free up equity from your home for other purposes. Equity release has the advantage that you should seek financial advice before you make any decisions. There are many equity release options, including monthly repayments. You don’t have to prove your affordability since the loan can be repaid by selling your property if you die or move into long-term care.
  • Retirement Income-Only Mortgage (RIO), For older borrowers, it may be worth looking into a retirement income-only (RIO), mortgage. RIO mortgages are similar to any other interest-only mortgages but have no fixed term. The capital is repaid when the borrower dies or moves into long-term care.
  • You can sell your property: While not everyone wants to if the value has risen significantly, you might be able to pay off your mortgage and purchase a smaller home.
  • Sell property or assets: It is worth taking inventory of all your assets, including shares and investments, especially if you’ve owned your house for over 25 years. It’s possible to get rid of your mortgage completely or reduce the amount you owe on a remortgage. This will help ensure that your monthly payments are affordable.
  • Extension of your term: Your current provider might agree to extend your term, depending on your situation. It is worth comparing your current provider’s offer with other options to ensure you aren’t overpaying.

As we’re a tech-heavy (and slick company) you can apply online to remortgage below:

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Refinance an interest-only mortgage to buy and let

Remortgaging a property for interest-only means that you have access to more lenders than when you do so with a residential loan.

It’s worth considering your options to switch to a repayment buy-to-let. You may be able to get a lower rate depending on how much you can borrow and the value and condition of your property. This will allow you to start servicing the interest and clearing capital.

Removing interest could also be an option if you have a repayment buy-to-let and find the repayments difficult.

Remortgaging to an interest-only mortgage

For residential homeowners looking to reduce the financial burden of rising interest rates, higher monthly payments and capital & repay the mortgage, an interest-only option could be an option.

This is not something you should take lightly. Before making a decision, it’s important to compile a complete income and expense report.

To see a comparison of your mortgage payments on interest-only and capital, use our mortgage calculator.

What is the repayment of an interest-only mortgage?

In interest-only mortgages, borrowers can repay only the interest of a mortgage over a specified term. Capital is repaid at the end.

Before granting a mortgage, lenders look for proof that the underlying capital is repayable at the end.

Lenders will have different acceptable methods of repaying the loan, but they all want to be sure that the strategy is sound. Lenders may place higher income thresholds depending on the risk involved in repayment.

Apply online to remortgage below:

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The benefits of an interest-only mortgage

  • To save money, switch to a lower interest rate.
  • To move to a lower LTV, use an increase in property values
  • You can borrow more money to purchase the property
  • Higher value borrowers will benefit from greater flexibility in financing

There are downsides to an interest-only mortgage

  • Higher LTVs are limited and interest-only mortgages are not available.
  • Lenders can only lend to customers who are interested in a particular product or service.
  • The borrower will need to show proof of a repayment vehicle
  • Borrowers at the lower end are less likely to have a choice

What is the difference between a repayment and an interest-only mortgage?

For interest-only remortgages, the average lender criteria will apply. However, lenders may have additional requirements that borrowers must meet.

For interest-only loans, the minimum income requirement is more stringent at £40,000 per year. Some lenders will require as much as £100,000. This depends on how the lender is repaying.

Additionally, loan-to-value ratios are lower than those offered for repayment mortgages. While LTVs up to 75% are possible, some high-street lenders will require that the property be owned at least 50% by the borrower.

Wealthier borrowers have more freedom with repayment and interest-only loans.

Lenders need to be able to show that the borrower can afford the loan.

As we’re a tech-heavy (and slick company) you can apply online to remortgage below:

Get started online