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Interest Only Remortgages

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By Pete Mugleston   Mortgage Advisor

Last updated: 13th January 2019

Here at Online Mortgage Advisor, customers often ask “can I remortgage an interest only mortgage?” and if this is a question you have pondered, you’ve come to the right place. We work with expert advisors with a wealth of experience catering for those who may have been turned down for this in the past.

In this article, we’ll discuss the following topics…

What is an interest only remortgage?

In order to explain what interest only remortgages are, we must first outline how they differ from repayment mortgages.

Repayment mortgages are the most common type offered by UK lenders, and with this form of agreement, the customer gradually repays the amount they borrowed over the course of the term - usually 25 years, although some go up to 35 and beyond - as well as the interest charged by the lender.

With an interest only mortgage, the borrower makes no capital repayments on the loan itself, just the interest. The full amount is repayable at the end of the term and the customer is required to have a firm plan to settle the debt.

Why take an interest only mortgage?

Interest only mortgages are an attractive option for some property hunters and investors as the monthly repayments are significantly lower than those of a repayment mortgage.

While this is obviously beneficial, some borrowers encounter financial uncertainty at the end of the term as they face the possibility of being unable to repay the capital.

They’re expected to have an investment plan to pay off the outstanding debt, and for some, this involves selling the property, although others in this position have found themselves with negative equity, making refinancing all but impossible.

To ensure affordability and make sure they’re on the best deal possible, many borrowers opt to remortgage at the end of the initial rate period to secure more favourable terms or raise funds by borrowing against equity.

How is an interest only remortgage repaid?

With an interest only mortgage, the borrower makes no capital repayments on the loan itself, just the interest. The full amount is repayable at the end of the term and the customer is required to have a firm plan to settle the debt.

As previously mentioned, some rely solely on the property sale for equity to repay the capital, but many prefer a repayment vehicle, such as savings, investments, endowments, stock and shares, or the sale of another property.

Indeed, lenders offering interest only deals will require proof of a suitable repayment strategy before rubber-stamping an interest only deal.

In some cases, this is not an issue as the property in question is offloaded when the householder dies or enters long-term care and the capital it raises pays off loan; but borrowers who wish to remain in their home beyond the end of the term must pursue alternative options if their investment plans have underperformed.

Acceptable interest only repayment vehicles

Anyone in the market for an interest only mortgage or remortgage deal will need to prove to the lender that they have a repayment vehicle arranged.

Acceptable repayment vehicles at UK lenders include…

  • Endowment policies
  • Stocks and shares
  • A stocks and shares ISA
  • Unit trusts
  • Investment bonds
  • Pension schemes
  • The sale of another property

Although these are the most commonly-accepted repayment plans, others may be satisfactory on a case-by-case basis at specialist lenders. If you are unsure whether your repayment vehicle is valid, make an enquiry and the advisors we work with will clear up any uncertainty.

What rates is my repayment vehicle likely to get me?

Most lenders will deal with an interest only remortgage borrower with an existing endowment policy, although they will usually offer a middle-projected figure (e.g. if a statement gives a range of three projected values, the middle figure will be used) on which to base their maximum loan lending decision.

Only a select few lenders will oblige you if you’re planning to use savings to settle the debt, and those aiming to sell the property to pay off the loan are usually required to hold equity of over £150k, and even then, only a minority of mortgage providers will be satisfied with that.

Meanwhile, those hoping to make up the shortfall through the sale of another property are facing a cap at 75% on LTV at most lenders.

The table below will give you an idea of the kind of rates you can expect to receive based on your repayment vehicle…

Repayment strategy Likelihood of acceptance Relevant info
Savings Most lenders are OK IO Lending often capped at the current savings amount
Endowment Most lenders are OK IO lending often capped at the “middle figure” on policy document
Pension lump sum Some lenders accept Capped at lump sum
Sale of this property & downsizing Only a few lenders accept Often equity needs to be at least enough to buy a suitable downsize home (circa 100-150k)
Sale of another property Most lenders accept Often limited to 75% LTV
Stocks / shares / ISA Most lenders accept Usually take 100% of the balance
Investment bond Most lenders Usually take 100% of the balance

Factors like these are key when it comes to securing optimum rates, but even the best interest only remortgage deals might not be the right option to fit your circumstances. Get in touch and the advisors we work with will discuss alternatives with you.

How to ensure you don’t pay more interest than you should

Staying on top of the market is important when looking at interest only remortgage deals. The best way to pay less is to refinance at (or sometimes before) the end of your initial rate period onto a new deal with the best rates and prevent the mortgage from switching over to the lender’s standard variable rate, which is often far higher.

Those looking to raise funds by borrowing against equity would also be advised to consider a total remortgage against the cost of additional borrowing with a second charge lender (thus having 2 mortgages on the same property).

This, however, may not be the only option available. Get in touch and the whole-of-market advisors we work with will look at and advise the best course of action.

Can I get an interest only remortgage anywhere in the UK?

Interest only remortgage rates tend to vary across the length and breadth of the UK. Some lenders are unwilling to offer deals in parts of Scotland, for instance, so borrowers eyeing these areas may need to seek specialist advice.

Although many providers will turn you down for an interest only agreement in certain Scottish postcodes, the advisors we work with can give you the best advice if you’re looking to invest north of the border.

In Northern Ireland, it’s a similar situation as a number of lenders are unwilling to offer interest only loans on properties there, while others may impose a minimum property value and mortgage rates specific to that country.

Wales, meanwhile, is covered by many of the leading UK lenders, although a minority do place restrictions on certain postcodes.

Is applying for an interest only mortgage different to a repayment mortgage?

Obtaining an interest only remortgage is no different to making a standard remortgage application, though the applicant must prove they have a repayment plan and the loan with be restricted at 75% LTV with most lenders. Some draw the line at 50% and others have stopped lending on an interest only basis altogether.

Interest only remortgage rates

The interest only remortgage rates you’ll be offered will vary from lender to lender, and depend on numerous factors such as:

  • Your loan to value ratio (the more equity you have the better the rate)
  • your repayment vehicle (the more commonly acceptable the more lenders you’ll have to choose from
  • Your income and affordability (most lenders offer around 4x income, so those wanting larger loans up to 5-6x income will have fewer options)
  • Your credit history (the more recent and severe an issue can mean a higher rate)
  • Various other factors (such as age, location, property type, construction material etc.)

We have best-rates mortgage tables here if you‘d like an idea of the live rates today, but to get an idea of the exact rate you could qualify for you’d need to make an enquiry and speak to one of the specialists.

What to do if you’re trapped on an interest only mortgage

It’s all well and good for interest only remortgage borrowers with a solid repayment vehicle, but what about those without one or customers with little or no equity? They are at risk of becoming mortgage prisoners, trapped with little hope refinancing.

However, there is light at the end of the proverbial tunnel for customers in these situations as they have the option to:

  • Negotiate a new deal with the same lender before the term ends,
  • Sell up,
  • Find the cash elsewhere,
  • Switch the whole mortgage to repayment
  • Or switch a portion to repayment and keep some interest only

How do I release equity/borrow more from my property If I can’t remortgage?

For those who wish to remain at their property, and in an ideal world, stay on interest only, a second charge mortgage could offer a lifeline.

A second charge mortgage is a loan secured against the property, typically lent on top of an existing mortgage. These are ideal for customers struggling to find capital, especially those who are unable to refinance.

These products can also be lent on more flexible terms, with lenders considering more severe credit issues, and offering loans over and above the normal affordability limits, at times exceeding 10x income for the right borrowers.

To find out whether a second charge mortgage is a viable option for you, get in touch and the advisors we work with will provide the expert insight you need.

Switching from an interest only to a repayment mortgage

With the same lender

If your ISA, endowment policy or other repayment vehicle isn’t performing as well as expected, the good news is that renegotiating an existing mortgage isn’t the only option available to interest only borrowers seeking a way to repay the balance.

Switching from interest only to repayment while remaining on the same mortgage product is possible with some lenders, providing you meet their affordability criteria. Although your monthly repayments will be higher, you’ll be chipping away at the outstanding balance over time, rather than be lumbered with a hefty shortfall at the end of term.

With a new lender

Refinancing an interest only mortgage with a new provider is often a viable option, if you wish to borrow more, renegotiate your terms, or port your interest only terms over to a repayment play. If eligible, it usually pays to do so because having access to the whole market means you’re likely to get a better deal than the one your current lender offers.

This is where having access to the entire market is hugely beneficial when it comes to interest only mortgage refinancing, and the advisors we work with will search the length and breadth of it to pair you up with the broker best suited to dealing with a borrower in your circumstances.

If porting your interest only terms over to a repayment plan sounds like a potential fit for you, get in touch and the advisors we work with will tell you more.

Refinancing an interest only mortgage

On the subject of new lenders, refinancing an interest only mortgage with another provider is often an option, if you wish to borrow more or renegotiate your terms, and if eligible, it usually pays to do so because having access to the whole market means you’re likely to get a better deal than the one your current lender offers.

This is where having access to the whole market is hugely beneficial when it comes to interest only mortgage refinancing, and the advisors we work with will search the entirety of it to pair you up with the broker best suited to dealing with a borrower in your circumstances.

Can I switch from repayment to interest only?

There may be customers who have already made a significant dent in their mortgage balance and wish to reduce their monthly payments by switching to interest only for the remainder of their term. Many lenders out there will be more than happy to accommodate this, subject to a thorough eligibility check as well as the usual interest only requirements being met.

Can I have part interest only and part repayment?

Yes! Whether you choose to renegotiate with your existing lender or look elsewhere, some lenders will offer you the chance to change part of your mortgage to repayment, which could address a projected shortfall at the end of term. This is known as a “part-and-part” mortgage, as it is part repayment and part interest only.

Put simply, borrowers on these deals will pay off some of the mortgage as they go, but not all of it. So, at the end of term, only a portion of the loan will be outstanding.

This could provide a best-of-both-worlds scenario for some customers, as your monthly repayments will be lower than with a repayment mortgage, while the amount due at the end of term will be less than with an interest only deal.

Interest only buy to let remortgages

Interest only mortgages are commonplace in the buy to let market, and property owners in this sector typically seek to remortgage for the reasons outlined above, whether it’s to raise money from their property or negotiate more favourable terms.

Even the best interest only remortgages, are generally higher than residential, and lenders will tell you this is because there is more risk involved with a buy to let interest only remortgage, as tenants failing to pay their rent can result in the loan defaulting.

That said, some lenders are offering favourable rates right now (and we work with advisors who can connect you with them), which is why so many landlords in this sector are opting to remortgage on interest only of late.

Of course, it isn’t just about rates as the overall cost of the mortgage is what’s important. Rates are irrelevant if your mortgage sets you back tens of thousands in setup fees. It’s about finding a balance, and the advisors we work with can help you offset the risks against the potential rewards and steer you towards the right deal.

Interest only remortgages in later life

Age can be a factor when a lender is determining eligibility, and some are unwilling to loan to borrowers aged over 65. Others are happy to provide an interest only remortgage for over 70s, and in some cases for borrowers up to 85 years of age. There are even a select few who impose no age cap at all.

These days, people are living and working longer, so later-life borrowing is becoming the new norm, and some lenders have introduced flexibility to cater for senior customers looking for remortgage deals on interest only. Of course, age is not the only variable they will take on board so you’d need to speak to an expert for the best advice and establish the right mortgage deal for you.

What else impacts interest only eligibility?

Factors like your income and credit score are also relevant, and many customers are turned down for an interest only remortgage based on these variables.

Interest only with bad credit

At OMA, we’re often asked whether it’s possible to refinance an interest only mortgage with bad credit, and although customers with issues such as county court judgements, debt management, IVAs, and bankruptcy may be limited where the number of available lenders are concerned, there are specialists that consider interest only buy to let deals in even the most complex scenarios.

Interest only affordability

Of course, lenders will also take your earnings into account when calculating your eligibility and some have strict minimum income requirements for both joint and single applicants, in many cases between £50,000 and £100,000.

Thankfully, it’s possible to find a specialist lender that will accept less or one that imposes no minimum income demands at all, as well as mortgage providers who are happy to cater for the self-employed.

Interest only remortgages for self-employed borrowers

At most lenders, the range of mortgage deals on offer is no different than it is for employed applicants, but many of the main providers will ask for three years’ worth of accounts. Only been trading for a year or two? No problem! There are specialist lenders out there who cater for borrower in these circumstances.

Property types

The property type you’re seeking a buy to let remortgage deal for could limit the number of viable lenders. Most will offer this product for standard property types such as terraced, semi-detached, detached or purpose-built flats, but buildings like studio flats or ex-council-built properties may require a specialise provider.

What to do it you’re declined for an interest only remortgage?

If you’ve been turned down for an interest only remortgage or have been unable to refinance one because of bad credit or any reason, or fear that you might be declined, get in touch and the expert advisors we work with will determine the best options available.

If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today 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 absolutely 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.

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