Interest-only remortgages

What is an interest-only remortgage?

An interest-only remortgage is a new interest-only mortgage you switch to after your previous interest-only mortgage deal ends.

Borrowers often move their mortgage at the end of a fixed-rate period to avoid moving onto the lender’s Standard Variable Rate (SVR), which can often mean more expensive repayments. Or if you are already on an SVR, you might want to lock into a fresh interest-only mortgage to save money.

It may also be beneficial to remortgage on an interest only deal if your property’s value has increased because this enables you to access a lower loan to value (LTV) and a cheaper interest rate.

Borrowers who have a lump sum could also pay off some of the capital on the loan to qualify for a lower LTV rate at remortgage.

If you want to take out more money against the property, perhaps for building improvements or developments, you could release cash through a remortgage.

Interest-only remortgages are more readily available for higher value transactions, wealthier borrowers and buy-to-let investors.

How is an interest-only remortgage repaid?

Interest-only mortgages allow borrowers to repay just the interest on a mortgage during a set term with the capital repaid at the end of the loan.

Lenders look for solid proof that the underlying capital can be repaid at the end of the term before granting a remortgage.

Acceptable methods of repaying the loan vary by lender but all will want to see that the strategy is credible. Depending on the risk of the repayment, some lenders may require higher income thresholds.

Is applying for an interest-only remortgage different to a repayment remortgage?

The normal lender criteria will apply to interest-only remortgages, but lenders tend to have additional criteria that borrowers need to meet.

Minimum income requirements are more stringent for interest-only. Most mainstream lenders set the bar at £50,000–£75,000 a year for a sole applicant, with several, including some high street names, now requiring a flat £75,000 regardless of whether you're applying alone or jointly. On a joint application, lenders typically want to see a combined income of at least £75,000–£100,000. Depending on your repayment strategy, some lenders will ask for £100,000 or more.

Loan-to-value ratios are lower than with repayment mortgages, too. Most lenders cap interest-only at 75% LTV, and the most competitive rates are usually reserved for borrowers with 40% deposit or more (60% LTV or lower). Some high street lenders will only lend up to 50% LTV on interest-only, depending on the repayment vehicle.

As a result, wealthier borrowers typically have more flexibility with interest-only loans and repayment strategies.

However, the most important issue for lenders is that there's good proof of a repayment strategy that will ensure the borrower has the means to pay back the loan at the end of the term.