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Interest-Only Remortgages

See how expert advice could help the best deal on your interest-only remortgage

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 25, 2021

If you have an interest-only mortgage, if you’ve ever asked “can I remortgage an interest-only mortgage?”, you’re not alone.

What is an interest-only remortgage?

By remortgaging an interest-only mortgage, you’re most likely to be either switching to a better interest rate while maintaining your interest-only arrangement or switching from interest-only terms to a repayment mortgage.

When you have an interest-only mortgage you make no capital repayment on the loan itself, only the interest. The full amount is repayable at the end of the term and you’re required to have a firm plan to settle the debt, usually evidenced by a suitable repayment vehicle.

Repayment mortgages are the most common type of mortgage offered by UK lenders. With a repayment mortgage, the borrower repays the amount borrowed over the course of 25 years, although the term of the mortgage can be shorter than this or, sometimes, extend over 35 years.

If you’re on a repayment mortgage, your monthly mortgage payments are made up of a small amount of capital repayment and interest on the full amount borrowed. Over time, the amount of interest you’re paying will reduce and the capital repayment will increase.

What are the benefits of 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. For some people, this might involve selling the property. However, if you find yourself in the unfortunate position of having negative equity at the time the loan is due to be repaid, refinancing can become almost 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 of an interest-only mortgage 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 signing off on 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 the outstanding debt; but borrowers who wish to remain in their home beyond the end of the term must pursue alternative options if their investment plans have under-performed.

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 in place.

Acceptable repayment vehicles for most mortgage lenders in the UK include:

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

While these are the most commonly-accepted repayment plans, specialist lenders may agree to alternative arrangements on a case-by-case basis

If you’re unsure whether your current repayment vehicle is valid or have concerns that it may be underperforming, make an enquiry or call 0808 189 2301 for a free, no-obligation chat.

The brokers we work with are all whole-of-market experts and we’ll match you with someone who will be happy to answer your questions and help you understand your options, and suggest potential solutions.

How will my interest-only repayment vehicle affect the remortgage terms I can get?

If you want to remortgage your interest-only mortgage and you have an existing endowment policy, most lenders will be happy to accommodate you.

However, when making their lending decision, they will usually offer based on the middle-projected figure from your endowment statement (e.g. if your statement shows three projected values, the middle figure will be used) to decide what rate to offer you on an interest-only remortgage agreement.

If you’re using savings to settle the interest-only mortgage loan, only a select few lenders will oblige a remortgage.

If you’re planning to sell the property in order to repay the capital, mortgage lenders would want you to hold equity over £150,000 and, even then, only a handful of mortgage providers will be willing to remortgage your interest-only mortgage on this basis.

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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 at 75% LTV
Stocks/Shares/ISA Most lenders accept Usually take 100% of the balance
Investment Bond Most lenders Usually take 100% of the balance

Your repayment vehicle will play a part in a lender’s decision when it comes to remortgaging your interest-only mortgage.

To get an accurate idea of the kind of remortgage terms you could get based on all the factors, get in touch and we’ll match you with one of the expert mortgage brokers we work with.

All the brokers we work with are whole-of-market brokers with access to mortgage lenders across the entire UK. They will be happy to answer your questions and make sure they find you the right lender with the best remortgage terms based on your own personal set of circumstances.

Call 0808 189 2301 or make an enquiry for a free, no obligation chat.

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).

Save time, hassle and money by talking to one of the expert whole-of-market brokers we work with. The service we offer is free, there’s no obligation and we won’t leave a mark on your credit rating. Call 0808 189 2301 to get started.

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. Read more about how to get a mortgage in Scotland in our dedicated guide.

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 remortgage different to a repayment remortgage?

Obtaining an interest-only remortgage is no different to making a standard remortgage application, though the applicant must prove they have a repayment plan to repay the capital and many lenders will restrict the loan to 75% LTV.

Some lenders require as much as 50% LTV 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, make an enquiry and speak to one of the specialist experts we work with.

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

It’s all well and good for interest-only remortgage borrowers with a solid repayment vehicle, but what if you’re in the unfortunate position of having an interest-only mortgage with little or no equity in your property?

If you’re stuck with this difficult situation, there are some options you could consider:

  • Negotiate a new deal with the same lender before the term ends
  • Sell up, for the best possible price
  • Find the cash elsewhere
  • Switch the whole mortgage to a repayment mortgage
  • 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?

If you wish to remain living in your property and, in an ideal world, would prefer to maintain an interest-only arrangement, a second charge mortgage could be a possible solution.

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 mortgage 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 mortgage 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 plan.

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, the advisors we work with will scour the entire mortgage market to find the lender with the best available terms, whatever your circumstances.

If switching 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, having access to the whole market means you’re likely to get a better deal than the one your current lender offers.

The whole-of-market brokers we work with will search for the best lender with the best mortgage terms. The service we offer is free, there’s no obligation and we won’t leave a mark on your credit rating.

Call 0808 189 2301 for a free, no-obligation chat.

Can I switch from repayment to interest-only?

If you have a repayment mortgage, have already made a significant dent in your mortgage balance and wish to reduce your monthly payments by switching to interest-only for the remainder of your term.

There are many lenders who are more than happy to accommodate this, subject to a thorough eligibility check as well as the usual interest-only requirements being met.

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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 the mortgage term. This is known as a “part-and-part” mortgage, because it’s 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 the mortgage 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. Property owners in this sector typically seek to remortgage to raise money from their property or negotiate more favourable terms.

Interest-only buy-to-let remortgages are generally more expensive than residential remortgages because there is more risk involved. This is because tenants failing to pay their rent could result in the loan defaulting.

That said, some lenders offer very favourable rates (and we work with expert brokers 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 thousands of pounds in setup fees.

It’s all about finding the right balance, and the expert advisors we work with can help you offset the risks against the potential rewards and steer you towards the right deal. Call 0808 189 2301 for a free, no-obligation chat.

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 can find themselves turned down for an interest-only remortgage based on the following variables:

  • Bad credit – 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 judgementsdebt management planIVAs, and bankruptcy may be limited where the number of available lenders are concerned, there are bad credit mortgage lenders that consider interest-only deals in even the most complex scenarios including with the bad credit issues mentioned above, it may be possible to get a mortgage with a DMP (Debt management plan).
  • 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.
  • Self-employed borrowers – 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 lenders will offer this product for standard property types such as terraced, semi-detached, detached or purpose-built flats, but non-standard buildings, like studio flats or ex-council-built properties, may require a specialist provider.

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

If you’ve been declined for a remortgage or have been unable to refinance one because of bad credit for 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 to you.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the 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 information 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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