Remortgage Interest Only Mortgage
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Remortgage Interest Only Mortgage
Gary Boakes answers frequently asked questions about interest only remortgages. Podcast recorded in August 2023.
What is an interest only mortgage and how does it differ from a repayment mortgage?
The big difference is the capital. On a repayment mortgage you are paying interest and the capital at the same time, so your mortgage will decrease over that period. If you have a 25 year mortgage term, that mortgage will be completed in 25 years because you’re paying back the debt and the interest.
On an interest only mortgage, you are purely paying the interest – so your mortgage balance will stay exactly the same from day one all the way up to 25 years.
What advice have you got for someone thinking about switching to interest only from a repayment mortgage?
At the moment a lot of people are thinking about the current cost of living and rising interest rates, and whether to move from a repayment mortgage to an interest only mortgage.
Most lenders have joined the Mortgage Charter – you might have read about this. As a result you can actually call your lender and ask to be put on interest only for six months. It is a question that has been coming up a lot more than in the past, because interest only is cheaper than a repayment mortgage on a monthly basis.
My advice is to make sure you understand the impact of that. You’ve been on a repayment mortgage where you’re fully aware that at a certain point your mortgage will end. On interest only, that’s not the case. It’s not just going to stop. It’s going to stay flat.
So you’ve got to have a plan in place for how you are going to repay that mortgage. I can understand why this is so popular now – you can save several hundred pounds a month by changing from repayment to interest only. But we’ve got to think of the long-term ramifications of that and how it affects your circumstances in the future.
Can you explain the concept of remortgaging an interest only mortgage?
It’s exactly the same as with a normal mortgage. We’re going to be looking at your income and expenditure. The criteria for interest only is a little bit more specific. Not every lender does interest only and there are set rules for what they will and won’t allow.
So when we are remortgaging, it’s basically looking at what your existing provider can do and comparing it with other providers. If your set of circumstances fit, we can move you to a new lender.
Why might someone choose to remortgage their interest only mortgage?
The first one is to get a competitive rate. A lot of people remortgage for that reason – to get a better rate than they can get with their current provider.
If we’re remortgaging someone from repayment to interest only, it’s usually to save them money on a monthly basis. It may be that people are remortgaging for home improvements or debt consolidation. There’s an array of reasons why people might want to remortgage and that obviously doesn’t change whether or not you’re on repayment or interest only.
How does the interest rate on an interest-only remortgage compare to other types of mortgages?
The lender will offer the same rate whether you’re on repayment or interest only. There is no difference between the rates. It’s just how you pay back the mortgage that changes.
Are there any specific eligibility criteria for remortgaging an interest only mortgage?
Interest only has changed quite dramatically. It isn’t something that a lot of people had in the recent past, but my parents only had an interest only mortgage on their first property with an endowment. A lot of people will remember that – but obviously it changed a lot after 2008. Interest only mortgages were considered to have contributed to the financial crisis.
It’s got better over the last few years, but the criteria and eligibility are not as simple as they used to be. You’ve got to have good equity in the property. Some providers would like £250,000 or £300,000 equity, for example.
You may have to have a certain salary – some lenders require you to have a joint income of over £100,000 to qualify for interest only. It may also be that they want you to have a 50% Loan to Value to qualify.
It might be that actually we can’t do it all interest only, but in that case we can do it part-and-part to fit within those rules. So speak to someone like myself to talk through that and see whether or not you qualify for an interest only mortgage.
What factors should someone consider when deciding whether to remortgage their interest only mortgage?
It’s the same factors as for anyone considering a remortgage. The reason you’re doing it is important – what are you wanting to achieve from the remortgage. Is it to release capital, to do some home improvements or purely to get a competitive rate? It’s going to differ from customer to customer.
What are the potential risks or drawbacks of remortgaging an interest only mortgage?
Again it depends on why you’re doing it. Obviously the concept of remortgaging is you’re taking your debt from your existing lender to another lender. Hopefully you’re doing that for positive reasons.
Perhaps you want to take money out to build an extension or you want a more competitive rate. These are the positives of why you want to remortgage.
The drawback with interest only is that not every lender does it, and the criteria differs quite a lot from lender to lender. It may well be that based on your circumstances you can’t do what you want to do. Perhaps there isn’t a lender out there that will support it.
If you have quite specific circumstances perhaps the interest rate will be a little bit higher and actually you don’t get that competitive rate. It really depends.
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Can you explain the process for remortgaging an interest only mortgage?
The process is the same as any mortgage. You will know when your mortgage comes up for renewal and you should start planning as early as you can. We start contacting all of our customers around seven months before their product ends, because at six months we can start looking at new lenders.
Your current provider will give you a new rate to review, as well. So the first thing is to plan for that and give yourself time. Speak to a broker like ourselves to review the market, the lenders and the rates. We’ll look to get as good a rate as we can based on your circumstances.
Depending on what you choose to do, it’s then a case of the legal paperwork. A solicitor will be involved but that’s generally part of the free legals that most lenders offer. Once everything is set up, your lender will change the day after your current rate ends.
What fees or costs are associated with remortgaging and interest only mortgages?We are a fee-free mortgage broker. We don’t charge for our advice. Any costs will be associated with the lender. There may well be a valuation fee, and there might be an arrangement fee for the product. We will review those depending on what you’re looking to do.
A lot of lenders will provide free legals, so most of the solicitor work is free. There might be some additional costs in the background for a telegraphic transfer perhaps, but they’re very minimal on a remortgage.
If you’re doing something more specific that you need a solicitor for – maybe if there’s a transfer of equity or something else – there may be some additional costs there. We would give you an accurate figure for what you will be spending.
If we feel that you’re going to be spending perhaps £250 or £300 in costs we will take that into account with regards to rates and whether the new deal is worth it. It’s all taken into account when we look at a remortgage for you.
What options are available if someone is unable to remortgage their interest only mortgage?
In most instances your lender will offer you a product transfer – they will give you a rate from their range that you’re eligible for. If there isn’t a product that you’re eligible for, and it’s very rare that’s the case, your mortgage will revert to a standard variable rate.
Your mortgage will continue, but at a higher rate than you were on previously. That’s very rare but it’s something we would discuss with you.
An important thing to consider is the point you’re at when thinking of a remortgage. If you’re very close to the end of that interest free mortgage, with just two or three years left, that needs to be looked at very differently. There should be something we can do, even if we can’t move you to another lender.
How can someone find the right remortgage deal for interest only mortgages?
Just come and speak to ourselves and we’ll have a look at it for you.
Are there any financial incentives or benefits to remortgaging an interest only mortgage?
We touched on the benefits of remortgaging earlier – hopefully, you’re going to get a more competitive rate or you might be looking to take money out of the property to do some work, consolidate debt or something else. We can obviously discuss the details with you and get you the benefit you’re aiming for.
There should always be a good reason why you want to remortgage.
Are there any specific mortgage lenders or institutions that specialise in remortgaging interest only mortgages?
Some lenders really like this area and some don’t. That’s the great thing about the mortgage market – we have such a wide range of lenders that cater to different people. It would be boring if they were all the same.
Some lenders are really good at interest only and we will approach different ones depending on whether, for example, you’re self-employed or not. We’ll research the criteria as some lenders have some very good offers for interest only.
What advice do you have for individuals who are considering re-mortgaging their interest only mortgage?
I say to everybody doing a remortgage – it’s about preparation. Don’t leave it to the last minute. If you wait until you’re near the end of your current deal you have fewer options – there’s less we can do for you.
At the moment interest rates are quite high, and some people feel a bit fearful. They’re hoping rates will drop and delaying making those choices. But come and speak to us.
If the market drops we can help you very quickly. But if markets go up, we want to be getting that lower rate as quickly as we can. If we can have six and a half or seven months with you, hopefully we can get a competitive rate ready for when your current deal ends. It’s all about preparation and talking to us – whether you want an interest only or a repayment mortgage.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up with your mortgage repayments.
You may have to pay an early repayment charge to your existing lender if you remortgage.