A popular option amongst customers is to remortgage, put simply it is where you take out a new mortgage with a new lender on a property you already own and have a mortgage on. The new mortgage takes the place of the mortgage you originally had on the property.

Remortgaging a property can improve buyer’s situations financially, either raising initial capital in a swift manner allowing one to consolidate shorter term debts, paying off a mortgage earlier than anticipated and thus reaping the rewards or reducing the size of repayments on an existing mortgage.

Interest-only mortgage help from our experts

There are a few things to understand before we get started.

An interest-only mortgage is a type of mortgage where you only make interest payments each month, as opposed to the interest and capital payments you would make on a repayment mortgage.

Making interest payments each month stops the mortgage balance from increasing but doesn’t go towards paying it off. You pay the full mortgage balance at the end of the mortgage term or when the property is sold.

The interest-only mortgage lender will require that you provide evidence of a suitable repayment vehicle – i.e. how you’re going to repay the mortgage at the end of the term.

Below we’ve listed some criteria you must meet to get an interest-only mortgage:

You must provide a minimum deposit of 25% for an interest-only mortgage

You must meet a minimum income requirement set by some lenders

You must be able to provide evidence of how you will repay the mortgage once the term is complete – e.g.

    • You’ll sell the property and use the funds from the sale to repay the mortgage
    • You’ll have access to funds by the end of the mortgage term
    • You have financial investments
    • You have equity in other properties that you intend to sell

As an authorised and experienced mortgage broker our team can search from across the UK mortgage market, and will usually have access to exclusive deals that aren’t available on the high street.

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    Interest-only: Frequently Asked Questions

    Most residential mortgages are repayment but some people find that residential interest-only mortgages suit them better, typically because the monthly payments are lower.

    You may find an interest-only residential mortgages useful if:

    • You have an alternative repayment strategy – e.g. you have equity in other properties that you could sell, or you have other investments
    • You’re planning on downsizing at the end of the mortgage term when it’s time to repay the mortgage – e.g. you intend on moving after your children have left home as you don’t want to maintain a big house
    • You want to remortgage onto an interest-only product because you want to reduce your monthly payments and you have a suitable repayment vehicle

    Most buy-to-let mortgages are arranged on an interest-only basis. If this is the type of mortgage you’re after then see our buy-to-let mortgage page.

    The main benefit of an interest-only mortgage is obviously that you only make interest payments each month – not both interest and capital payments.

    For most lenders, the maximum LTV (loan-to-value) you can get on an interest-only mortgage is 75%. However a few lenders will allow LTVs up to 80%.

    There’s also the other possibility of a part interest-only and part repayment mortgage. Some lenders will allow part interest-only and part repayment mortgages up to 85% LTV, but not 90%. For more information about this kind of specialist mortgage arrangement, speak to an adviser on: 01634 968111.

    As your monthly payment on an interest-only mortgage just covers the interest accruing and does not reduce the mortgage balance, at the end of the term you will still owe the same amount that you initially borrowed subject to you not having made any other capital reductions during this time.

    Some, but not all, lenders allow customers to switch their mortgage from a repayment to an interest-only basis. Those that do allow a switch from repayment to interest-only will need to verify that you have an acceptable repayment strategy in place to repay the mortgage at the end of the agreed term.

    If you have an existing interest-only mortgage this may have been arranged on the basis that you have a recognised savings plan such as an ISA or Endowment policy to repay the borrowing. For some however, the repayment strategy is to be the sale of the mortgaged property at the end of the term. Depending on how the value of your property has changed over the years, you may be able to repay the mortgage and also use any equity to then purchase a property at a lesser value.

    If you are thinking about taking out a new interest-only residential mortgage, then many lenders in the current market would not consider the future sale of the property as a suitable repayment plan. These lenders would still need to be satisfied that you have an alternative means of repaying the loan other than the property itself.  However, some lenders are acceptable to the mortgaged property being used as the repayment vehicle subject to the loan to value and other elements of your circumstances meeting their criteria.

    Yes, most lenders allow customers to switch their mortgage from an interest-only to a repayment basis within the term of the mortgage.

    Yes. Current mortgage rules mean that lenders need to know both that you can afford to meet your monthly mortgage payments, and that you have a repayment vehicle in place that should be sufficient to repay the total mortgage balance at the end of the agreed mortgage term. The lender will seek to verify this when you apply for a new interest-only mortgage, and may also follow up during the mortgage term to ensure that your repayment vehicle is still on track to repay the debt.

    In the past, lenders did not always have to verify that a repayment vehicle was in place when lending on an interest-only basis. If you have an existing interest-only mortgage and no designated repayment vehicle, or your repayment vehicle isn’t on track to cover the total mortgage balance at the end of the term, then you should contact your lender or a mortgage broker as soon as possible to discuss your options.

    As the name perhaps suggests, a “part-and-part” mortgage is part repayment and part interest-only. With this type of mortgage, you would have a repayment vehicle that only covers part of the total mortgage debt.

    Part-and-part mortgages offer a middle ground between a full repayment mortgage and a full interest-only mortgage. The monthly payments are lower than on an equivalent repayment mortgage, and because part of the mortgage balance is being repaid over the term, you pay less total interest than you would on an interest-only mortgage.

    An Interest-only mortgage can be remortgaged onto a new deal. However, you must be able to adhere to some strict criteria as these types of mortgages are deemed as higher risk lending by the regulator.

    Typically, lenders will consider an Interest-only remortgage for those who have good levels of income, loan to values of 75% or less, a significant amount of equity, as well as minimum property values above certain parameters.

    To check if you qualify for an Interest-only remortgage it is advisable that you get in touch with one of our specialist Mortgage Advisers who will be able guide you further.

    If you are looking to take out an interest-only mortgage, then it is vitally important to expert professional advice on your plan, even if you are supremely confident that this is the right option for you. An interest-only arrangement can seem very attractive in the immediate circumstances, with its cheaper monthly payments, and can be a very effective way to keep your ongoing costs down while maintaining a growing asset or storing up an investment for the future.

    However, you have to be absolutely certain that you will be able to repay the loan when it comes to term. Lenders will require you to have an acceptable ‘repayment vehicle’ in place before they can accept your application. This could be a pension, endowment policy, ISA or other investment fund that accrues interest, or perhaps you will simply plan to sell the property, assuming that it will have held its value throughout the duration of the loan. This entails an element of risk, as many historic holders of interest-only mortgages with insufficient endowment

    With access to over 11,000+ mortgage products via over 90+ lenders, we are confident that we will be able to match you with the right mortgage to meet your needs, and will give you all the reasons why we know a particular interest only mortgage will work for you. Get in touch today to arrange a free, no-obligation initial discussion, and we’ll give you a clear picture of all your options going forward.

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