Interest-Only Remortgage

Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon. 

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Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon. 

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Interest-Only Remortgage, Vantage Mortgages

Interest-Only Remortgage

Adam Messer is back to talk us through an interest-only remortgage.

What is an interest-only remortgage?

Interest-only is not for everyone. But there’s a certain time when interest-only can be relevant for people. It’s essentially where you’re only paying the interest on your mortgage each month. You’re not actually ever reducing the balance of your borrowing. 

That’s useful in various situations, which we’ll come on to in this conversation. But the basic principle of interest-only is that your monthly payment is going to be lower than on a traditional repayment mortgage.

But that’s because you’re only covering the interest – you’re not actually repaying the debt at all. At the end of the mortgage term, you’ll still owe as much as you did at the start, and that’s not for everyone.

A remortgage just means moving from one lender to the next. So presumably, anyone looking for an interest-only remortgage already has a mortgage in place and wants to turn their current mortgage into an interest-only deal, for some reason.

How does an interest-only remortgage differ from other types of remortgages?

Traditionally, most people would expect to be repaying their mortgage over time. That’s what we’re all trained to do from the start – repay the debt and ultimately not have a mortgage later in life.

There are lots of good reasons for that, but not everyone wants it. The big difference with this type of remortgage is you’ll only be covering the interest. You’re not repaying the mortgage over time as you would on a traditional product.

Why might someone want an interest-only remortgage?

It’s about keeping your repayments low. You might have a life event or something you’re planning. Maybe you have got some inheritance coming your way that will clear the debt for you and you want to save money in the meantime.

It might just be a short term solution. With things as they are currently, recording this at the end of October 2023, times are tough with a high cost of living. We’ve seen a few people come to us to just reduce their monthly payments for a while.

While interest-only isn’t a long term solution, it could just provide a little bit of breathing space for a couple of years whilst rates are high.

Hopefully rates will come down and you can swap back to repayment again. I’ve had that scenario brought to me a lot in recent times. Clients want to just pay the interest and reduce their payments for six months or a year. It’s sometimes an option – but it’s not for everyone.

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Who is eligible for an interest-only remortgage?

There are various different criteria to consider when you go in for an interest-only mortgage. These vary from lender to lender and depending on the type of mortgage.

We should probably mention Buy to Let mortgages, which you would generally expect to be interest-only. Most landlords buy investment properties on interest-only mortgages – and we have other content about these types of products in our Buy to Let section.

But here we’re talking about a mortgage on your main residence – the house you live in. Some lenders are more flexible than others. Some set a minimum income for an interest-only mortgage – you might need to earn £50,000, £70,000 or even £100,000 in some cases. There is at least one high street lender that doesn’t have a minimum income, however.

We then need to think about how we’re going to pay back this mortgage at the end, because we’re not repaying it each month. That might involve the sale of the property – which is quite a common one. If you have a lot of equity in the property, of £300,000 perhaps, you might just cover the interest for now and then at some point in the future you will downsize.

You sell the property and buy a smaller one – and because you have a good chunk of equity there, you know you can buy a smaller property for that amount.

That’s known as a repayment vehicle. It has nothing to do with actual vehicles. It’s just the method that will pay the mortgage off. Another route is endowments. They are not very common these days as they used to be a bit taboo, but they needn’t be these days.

You might have savings, ISAs, stocks and shares, pensions, bonuses… lenders will consider all sorts of different things as repayment vehicles. You might have other property in the background you can sell to repay the mortgage. There’s lots of different routes to consider.

What are the benefits of an interest-only remortgage and what are the drawbacks or risks?

The key benefit is that your monthly payment is going to be less than if you’re repaying the mortgage.

If you’re in your 20s and buying your first property, you’ve got 35 or 40 years to get it repaid. It’s very unlikely that you’ll even consider an interest-only mortgage. But if you’re later in life, perhaps with other investments or other things in the background, or a big house and lots of equity, interest-only can make sense.

Perhaps you just need this mortgage for a few years until you can downsize. In that case, it’s going to cost you less per month.

But at the same time, the drawback is you’re not reducing the balance. Most First Time Buyers as we said will want to be repaying the mortgage and, to be honest, unless you’ve got a big deposit, the mortgage lender is going to want you to repay the mortgage over time.

With interest only you still owe as much at the end as you did at the start. If you get to age 65 or 70 and you haven’t repaid your mortgage, what can you do? It’s hard to get a new mortgage at that point.

Will you want to downsize, will you have enough equity? What’s the plan? With interest-only you need a plan to repay – without it you’ll be absolutely stuck.

How does the application process differ for an interest-only remortgage?

The application process itself is the same, but the lender’s going to have some extra questions about how you can repay the mortgage.

If that’s the sale of the property, they will make sure that there’s enough equity from the start. If there are ISAs, stocks or other properties they will check those things will repay the loan at the end of the term.

We can’t just decide to worry about it in 20 years time. That doesn’t really cut it for the lender – you need to have a plan in place. Without a plan it’s very hard to get an interest-only mortgage. But if you’ve got a plan, there are plenty of lenders we can go to.

What are the repayment options for an interest-only remortgage?

The most common repayment vehicle is the sale of the property. The lender’s got certain criteria there. There’s one high street lender that stands out for this type of borrowing. There’s a couple of others that aren’t bad.

To use the sale of the property you’re mortgaging as the repayment vehicle, you will need a certain amount of equity – at least £250,000 if not £300,000 depending on the lender. If you have that kind of equity and you’re comfortable that you could buy a new property for that amount, you can say to the lender that you will downsize and use the equity in the property to buy a cheaper one. That’s the repayment vehicle we use the most.

If you’ve got other investment properties, we could use the equity in those. The chances are that your other properties are on interest-only as well. You might have a mortgage, but there will be some equity as well that can be helpful.

You might have an endowment that’s set to pay out a certain amount at the end of the term. In case anyone’s worried about endowments, I’ll touch on this. The reason we had problems with endowments in the past is based on the fact that they have a guaranteed payout and an amount that we hope they’ll pay out.

People were using the ‘hopeful’ amount to cover their interest-only mortgages – and then that hope fell short. So today we only use the guaranteed figure as a repayment vehicle. So if you’ve got an endowment that will pay out £50,000 but you hope it might pay out £75,000 we’re only going to use that £50,000 to cover the interest-only mortgage.

You might have a savings plan like an ISA or stocks and shares. You might show that you pay in a certain amount each month and that will have a predicted end value we can use.

We can’t use future inheritance, even if you know a family member is going to die and pass money on. We have got no control over that. They might outlive the term of your mortgage or they might change their mind about leaving it to you. We can only use cold, hard facts for repayment methods.

What happens when the interest-only period ends?

At the end of the term, the lender will want their money back. They’re probably not going to knock on your door, but they will contact you by letter.

I can’t speak for every single lender, but let’s say your mortgage ends in February and they write to you now. If you’re not quite going to meet the February deadline but we can demonstrate to the lender that there’s something in place, they will be comfortable.

You might have a new mortgage application in – as long as you keep paying the interest they’re not suddenly going to come and take your property away.

Hopefully your investment plan is ready to pay out or your property is on the market and selling for the right amount of money – or maybe we’ve got another plan at this point, like a retirement mortgage or equity release. As long as you’ve got something in place that’s fine.

But the lender is going to want their money back one way or another. So if that means you have to sell the house, then you have to sell.

What should borrowers consider before taking out an interest-only remortgage?

Once we’ve got that plan in place, certain lenders are happy with some plans and not others. Some will accept the sale of the property, while others won’t.

We also need to factor in your age. Lenders on interest-only won’t always go as long a term as they would on a repayment mortgage. You might be able to take a repayment mortgage to age 75 with some lenders. On interest-only that might be a maximum of age 70.

So we need to have a plan in place to repay the mortgage. It might be a loose plan for now, because we’ve got 35 years to worry about it. But if you only have five years to repay it, it needs to be much more definitive.

Are there any alternatives to an interest-only remortgage?

The alternative is a repayment mortgage, where by the end of the mortgage term the debt will be paid off – and that’s quite a different thing. You usually want interest-only for a specific reason.

How can a broker help with an interest-only remortgage?

Not all lenders do interest-only and some of them have unusual, quirky criteria. And those pesky meerkats on comparison sites won’t ever tell you whether you’re eligible or not – so you need to speak to a proper mortgage broker that knows the criteria.

This isn’t something you’ll necessarily find yourself online. You do need to speak to a mortgage broker, and we’ll make it as simple as possible.

Think carefully before securing other debts against your home.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Your home may be repossessed if you do not keep up with your mortgage repayments.