The total mortgage balance needs to be repaid in full at the end of the agreed mortgage term, typically from the proceeds of a repayment vehicle such as an ISA, endowment policy or other investment plan. If you do not have a separate suitable repayment vehicle in place, then the loan may have to be repaid from the sale of your home.
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.
Keep reading to find information on the process and for answers to some of your main FAQ’s.
You can also learn about the different types of mortgages and interest rates in our guide.
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
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.