Remortgaging an interest-only mortgage
If your interest-only mortgage term is coming to an end and you're looking for the best-in-market rates, the specialist mortgage brokers at CLS Money can help you track down a deal that suits you perfectly.
What is an interest-only mortgage?
An interest-only mortgage is a loan where the borrower only pays off the interest charged by the lender for the mortgage term and none of the capital (the loan amount) to pay for the property.
At the end of the term, the buyer must have a credible plan to buy their home, paying off the capital with a lump sum.
Lenders must ensure that each borrower has a credible plan to pay off the capital on completion before agreeing to the mortgage.
How do you pay off the capital at the end of the mortgage term?
There are several ways to ensure you have the money to pay for your home at the end of an interest-only mortgage. This might be a savings scheme, endowment policy, stocks, shares or equivalent ISA, investments, bonds, a pension scheme, unit trusts, or the sale of another property.
You may be able to repay the loan by selling the property itself, but only if it isn't your primary residence. The whole idea of ensuring a suitable plan to pay for the property is to prevent buyers from losing their homes and somewhere to live.
Why choose an interest-only mortgage?
By only repaying interest, interest-only mortgages offer lower monthly repayments than they would if they included the loan amount, as it would be with a capital repayment mortgage.
By taking an option that offers lower monthly payments, borrowers can afford to buy larger properties or homes in more expensive areas. In addition, if you plan to sell the property before the loan completes or you'll only live there for a limited time, you could stand to profit from any increases in the property market or through inflation.
Interest-only mortgages also give buyers a chance to get on the property ladder with lower payments and increase them to cover the capital or invest in a savings scheme when their circumstances improve.
For others, leaving income available to invest in other opportunities is one way of meeting the capital repayment at the end of the term but with more profit if the option is more successful than anticipated.
Why would I want to remortgage my property?
Your home is likely the most expensive thing you ever buy and your biggest financial commitment. But unfortunately, the interest rates that apply to your mortgage repayments fluctuate unless you tie yourself into a fixed-rate mortgage.
When you remortgage, you apply for a brand new mortgage loan, using it to pay off your existing lender and moving the remaining debt to your new provider.
To get a better deal
Fixed-rate mortgages only apply for a reasonably short term, so renewing that deal with the same provider isn't always an option. Instead, the way to get the best deal in your situation is to explore the mortgage market and switch mortgages to the one that provides the lowest interest rates, charges, and monthly mortgage payments.
If you're not already on a fixed rate, fluctuations in interest rates can skyrocket your monthly repayments, forcing you to find a new deal where you can afford to meet your monthly repayments.
To release equity
After paying a mortgage for a while, you will have built up equity – the money you've already paid into the mortgage. Your existing lender may allow you to use that equity to make home improvements or to make a major purchase. However, it will change the terms of the mortgage, so, in effect, you'd be remortgaging your property with your current provider. However, you might have to change lenders if you don't meet your existing lender's criteria.
To move onto a repayment mortgage
Borrowers whose circumstances have improved since they took out their interest-only mortgage might feel it's time to move onto a repayment mortgage and start paying off the capital. But, again, if they don't meet their current mortgage provider's lender criteria or if there's a better deal elsewhere, they may choose to move to another provider.
Can I remortgage with my existing lender?
Most providers will happily consider a remortgage application if you meet your existing lender's loan criteria. However, the process is practically the same as your first application, and you'll be expected to prove all the figures of your affordability assessment and provide a healthy credit score.
CLS – your expert mortgage brokers
We specialise in helping our clients remortgage their homes on an interest-only basis. With unrivalled access to a vast range of High Street names, private banks and specialist lenders, our expert brokers have the knowledge and the resources to find a new deal that's cost-effective and well-suited to your longer-term financial aims.
We support you through the entire remortgage, taking care to explain the ramifications of every decision you make so that you emerge from the process feeling 100% confident in your new interest-only mortgage plan.
Remember, if you enter into another interest-only arrangement, you will need to make sure you have an alternative repayment vehicle that will provide you with enough funds to clear the total balance of your mortgage when your term ends.
In addition, some lenders will only accept certain investments as a repayment strategy, so you should consider this when researching your options. We'll take the time to explain each lender's criteria to you when we're searching for the right product.
If your personal circumstances have changed and you're looking into repayment mortgages, upgrading your loan to include the capital, we can help you calculate how much your new monthly payments will be on either a fixed-rate or variable-rate agreement. Alternatively, if you're only looking for a better interest rate from other mortgage lenders, we're here for you too.
Whichever type of remortgage you're looking into – repayment or interest-only remortgage deals – as an expert broker, we can guide you to the many lenders ready to beat your current deal.