An interest-only remortgage is an interest-only mortgage that you take out after a previous interest-only mortgage.
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.
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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Switch to a lower rate to save money
Use an increase in property value to move to a lower LTV
Borrow more money against the property
Increased flexibility over finances for higher value borrowers
Interest-only mortgage choice is limited for higher LTVs
Lenders have more restrictive criteria for interest-only customers
Borrowers will need to prove they have a repayment vehicle
Choice is narrower for borrowers at the lower end of the property market
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.
Borrowers looking to remortgage interest-only loans will need to prove they have a credible plan to repay the underlying capital at the end of the term.
Below are some of the repayment vehicles that are accepted by lenders.
Lenders will be looking to see that the projected sum at maturity will need to be enough to cover the capital.
An investment portfolio can usually be used to repay the loan but there may be stipulations on the types of investments, for example, they may be restricted to the FTSE stock exchange and be based in the UK.
An ISA can be part of an investment portfolio or standalone vehicle. Some lenders may require that the account has been held for at least 12 months.
This is another type of investment that can be used as a repayment vehicle. Unit trusts can be used alongside other stocks and shares as part of an overall investment portfolio.
These investments will need to be based in the UK and can be part of a wider investment portfolio.
A percentage of retirement savings may be used if the overall projected fund is large enough.
Bonuses are accepted by some lenders. They will expect the capital to be paid off periodically.
Many lenders will permit you to sell the property to repay the mortgage as long as there is a certain level of equity in the home.
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, with the bar starting at around £40,000 a year. Depending on the repayment strategy, some lenders want to see as much as £100,000 a year.
Furthermore, the loan-to-value ratios on offer are lower than with repayment mortgages. Some high street lenders require at least 50% equity in the property although LTVs of 75% are available.
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 repayment strategy that will ensure the borrower has the means to pay back the loan at the end of the term.
Yes, lenders will deem some strategies as riskier than others.
It depends on the individual circumstances of the borrower.
Remortgages can take anywhere between four and eight weeks to arrange.
Yes, you can get a mortgage offer from a lender before you need it. Some remortgage offers last for several months.
It is always good to plan ahead and make sure you have an offer in place before your current deal ends so you don’t end up moving onto your lender’s standard variable rate.
Yes, remortgage providers will usually let you borrow more than you owe on your property, particularly if your home has gone up in value. You can use the extra money for specific purposes like renovations.
The lender will want to know what the cash is for and will carry out affordability checks to make sure you can make the repayments comfortably.
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