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Extending the term on an interest only mortgage

Everything you need to know about the terms of an interest only mortgage

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 13th January 2019* | Published: 13th January 2019

What kind of terms are available on interest-only mortgages?

We are often approached by customers enquiring about interest-only home loans.

Some of the most common questions are surrounding interest only mortgage terms, and whether there are providers out there who can tailor the mortgage length to the borrowers’ individual needs.

The good news is that yes, there are flexible lenders out there, and there are many influencing factors you need to know about first.

Every mortgage provider is different as to what they will and won’t accept on a mortgage application, and it’s certainly not the be all and end all if you’ve been turned away by a previous broker or lender.

So, whether you’re seeking a temporary or short term interest only mortgage, or asking yourself the question “can I extend my interest only mortgage term?”, you’ve come to the right place. Read on, where this article will be covering:

What is an interest only mortgage?

An interest only mortgage is a loan in which the borrower only pays the interest owed each month, across an agreed period. Interest-only plans are a lot cheaper than “conventional” repayment mortgages, where the monthly payments cover both the loan and interest owed.

Interest-only can therefore be a tempting prospect for buyers looking for more affordable repayments or a Buy to Let mortgage, but bear in mind that once the period is up, you will still owe 100% of capital on the property.

How long can you have an interest only mortgage?

Typically, an interest-only mortgage term tends to range between 5 and 25 years. There are some lenders that will consider longer terms, some spanning to 30,35 and even 40 years in the right circumstances.

When this term is over (or before), the usual process is to repay the capital, using funds from your selected “repayment vehicle”.

What happens if you only require a short term interest-only mortgage?

For example, perhaps you’re keen to get onto the ladder ASAP but you’ve got a large sum of money tied up in other investments that you won’t have access to for the next year or so?

In this situation, one option may be to take out an interest-only loan until you have access to your funds, after which time you may want to repay some or all of the loan in full. This is relatively common practice.

Attention should be given to the cost of repayment, as those who take an interest only mortgage and plan to repay within a certain time-frame, may be subject to early repayment charges if on the wrong deal.

For example, if you want to repay the mortgage in 2 years time, you could take a 5 year term on a 2 year fixed rate, and then have no penalty to pay. If, however you took a 5 year fixed rate, you may have to pay a large sum. Getting the right advice to suit you is therefore really important.

Can I extend the length of my interest only mortgage term?

If you’re approaching the end of the agreed period and want to extend your interest only mortgage term, there are options available. While some providers may allow you to do this, it is not guaranteed - but don’t fear, for there are plenty of other solutions available and the advisors we work with will be able to help with the right advice.

Next, we’ll be discussing interest-only mortgage extensions alongside some other common options which may be useful if you’re not eligible to extend your current plan.

Extending your interest-only term with your current provider

One way of increasing your interest-only term is to , inform your lender as soon as possible -  they may be able to extend and keep you on the same mortgage product, or indeed , could have more options available to you on different products that may fit with your needs, without having to refinance to a new lender.

Older borrowers taking interest only into retirement

It’s worth noting that you’re more likely to struggle being accepted for an interest only extension if you’re beyond a certain age; most providers cap the lending age at 75, but some lenders will accept applications from those up to the age of 85 and a few have no age limits.

In general, younger borrowers are more likely to be approved for an extension on an interest-only for this reason.

What options do I have if I can’t extend my current interest-only mortgage?

In this situation, there are a few options open to you:

  • Switch lenders –
    You may find a more sympathetic lender with lower interest rates – talk to one of the expert advisors we work with about this.
  • Pay off in cash –
    This can be savings or help from family or friends.
  • Sell the property –
    You may make enough to be able to pay off the loan and purchase a more modest home.
  • Repossession –
    This is the worst outcome. Again, talk to one of the advisors we work with before this becomes inevitable - they may be able to help.

Switch to a repayment mortgage

As an example, imagine you took out a 15 year interest only mortgage for £200,000, with an interest-only rate of 3.5%.

The remaining capital will need to be repaid 15 years after the contract begins.

But suppose that in 10 years in you’re worried you won’t be able to raise enough capital during the remaining five years.

At an interest rate of 3.5%, your interest-only payments would be £583 per month. If you switched to a repayment basis at this point with just five years remaining, your monthly payments (capital plus interest) would be a whopping £3,691 - probably unaffordable for most.

Say you extend your mortgage to run for a further 15 years from this point (assuming your interest rate of 3.5% stayed the same), the monthly payment would drop to £1,447 a month. Although still high, if you can afford to do so you would at least be guaranteed that your debt would be cleared by the end of the plan.

Of course, if these monthly payments are unaffordable you may be given the alternative option to switch to a part and part mortgage plan.

Remortgage to a lower rate and overpay

One of the most common routes borrowers go down if they’ve been declined an interest-only extension is to remortgage.

This idea is that, through opting for a lower rate mortgage you can cut the interest fees, thus freeing up more cash which can be used towards making monthly over-payments; or set aside cash ready to pay back the capital at the end of the period.

Downsize your property

Another “simple” solution to resolving a declined interest-only extension is to sell your home and move to a cheaper property, whereby the profits made from the sale can be used towards the outstanding balance.

However, uprooting and moving to a cheaper area may not be a viable option, and there are of course the other costs and efforts associated with taking out another loan on a new property to consider.

Equity release

As mentioned earlier, the situation can be more challenging for older buyers and the above options may not be viable.

Despite many providers upping their lending limit to the age of 85, many will still require proof of steady income in order to accept, which may be difficult/impossible to prove if you’re retired and your pension income doesn’t stack up.

With equity release, you are not required to make repayments before the end of the plan so affordability is not part of the assessment, although you may pay off the monthly interest if you can afford to. If not, it will be added onto the total at a fixed rate, each year.

The loan and the interest are then repaid in full, usually from the sale of your property when you die or go into residential care.

Switch to a retirement interest-only mortgage

A retirement interest-only mortgage is another option for older people as it allows you to repay what you owe at a fixed interest rate, and there is no set repayment deadline.Again, the balance is only payable on the sale of the property, either when the homeowner passes away or is moved into residential care. With this plan however, you are still required to repay the monthly interest payments, so the mortgage must be affordable.

What are the longer term repayment amounts compared to interest-only mortgages?

How long you have an interest only mortgage for makes no difference to the monthly payments, as just the interest is being repaid, so the balance and repayments are not impacted.

The chart below breaks down the approx. costs when compared to a repayment mortgage, so you can see the difference, based on a £200,000 mortgage at a 4% interest rate.

The repayments would be calculated as follows for each interest-only payment term*:

Term Interest-Only Payment Capital + Interest Payment
5 year interest only mortgage £666 £3,683
6 year interest only mortgage £666 £3,129
7 year interest only mortgage £666 £2,773
8 year interest only mortgage £666 £2,437
9 year interest only mortgage £666 £2,208
10 year interest only mortgage £666 £2,025
15 year interest only mortgage £666 £1,479
20 year interest only mortgage £666 £1,212
25 year interest only mortgage £666 £1,055
30 year interest only mortgage £666 £954
35 year interest only mortgage £666 £885
40 year interest only mortgage £666 £835

*The chart above is for demonstrative purposes only and you should always check with your lender or broker for the most up-to-date information.

What are the eligibility criteria for interest-only loans and extensions?

Interest only mortgages are harder to come by than repayment mortgages due to being higher risk, and as such you will not have as many providers willing to offer this sort of mortgage (especially at higher loan to value (LTV) ratios.

However, your eligibility will be assessed against a number of factors relating to your individual circumstances, many of which will also impact your ability to extend an interest-only mortgage, by refinancing to a new lender.

Unlike an interest only mortgage for a Buy to Let, which relies on the sale of the property to pay out the loan, for a residential interest only mortgage, you’ll need an exit strategy or repayment vehicle that the lender will find acceptable. An exit strategy is simply a way of paying off the capital at the end of the loan term.

Repayment vehicles

As you will still owe the total amount owed on your property after the interest-only term is up, lenders will require you to have a solid “repayment vehicle” in place to repay the outstanding capital. There are a number of ways you can choose to do this, and all lenders will have different requirements as to what they will. Some of the most common methods are:

  • Sale of another property
  • Stocks and shares
  • Investment bonds
  • Endowment policies
  • ISAs or other cash savings
  • Pension funds

Loan to Value (LTV)

As well as having a solid repayment plan, most lenders will have lower LTV requirements than with a repayment mortgage due interest-only being higher risk.

This means that, typically, you will be required to have a higher deposit together for the property you’re looking to buy.

While a handful of lenders will consider you for a interest-only mortgage with an LTV of 85% (15% deposit saved), the majority will want a minimum of 75% LTV (25% deposit).

Affordability

As with any type of mortgage, lenders will have minimum income requirements so as to prove your affordability, and determine how much they are happy to lend you over an agreed term. They will also look at your debt to income ratio to assess your income against your outgoings to see if you can realistically afford a mortgage.

If you later request an extension on your interest-only, lenders will question your ability to repay the capital, and, while they may allow an extension (depending on the circumstances), they may put a cap on how long they allow you to extend for, and/or suggest you downsize or remortgage.

Credit history

As covered, interest only mortgages are typically perceived as more risky, so any other negative instances factors against you will make providers even less willing to lend to you from the offset.

Bad credit is one of the main factors impacting your eligibility for a mortgage, but whether or not you’re accepted with depend on the severity and/or recency of the events.

For more information see our article here on bad credit mortgages.

Talk to an expert in interest only mortgages today

If you’re looking to extend your interest only mortgage, or require more information surrounding the terms of interest-only, call Online Mortgage Advisor on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee, and there’s no obligation or marks on your credit rating.

Updated: 13th January 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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