Interest Only Remortgage
With an interest-only remortgage, you only pay back the interest that is owed on your mortgage each month. You do not repay any of the amount you originally borrowed until the end of the mortgage term. Instead, you pay into a long-term savings plan which, on maturity, is intended to pay off the outstanding amount you owe on the mortgage. As long as you've made all your monthly interest payments together with any fees applicable, the amount you owe at the end of the mortgage term will be the same as the amount you borrowed. However your savings plan is not guaranteed to cover the outstanding capital and so you may have to make up the shortfall yourself.
There are three main types of interest only remortgages that you may come across:
ISA remortgage - This would involve paying back your remortgage loan with savings from an Individual Savings Account (ISA). An ISA remortgage comes with potential tax benefits; although if interest rates are low, there is a risk that the savings may be unable to pay off the loan upon maturity.
Endowment remortgage - An endowment remortgage involves you paying back your loan by using a life insurance and a savings policy. This may work as a fairly expensive option, and could be less flexible than an ISA remortgage.
Pension scheme remortgage - You would pay off this type of remortgage by using part of your mortgage loan. This could be particularly useful to higher rate taxpayers or self-employed people.
Finding an interest only remortgage
Since the recent economic downturn, an interest only remortgage can be harder to find and this type of deal seems to be less popular with mortgage lenders as they are more risky. Many major lenders have withdrawn their interest only remortgage deals. You have a better chance of getting an interest only remortgage if you meet certain strict lending criteria – for example, you may have a better chance of getting an interest only remortgage or a good rate on a repayment remortgage if you have 50% equity or higher. You will also need to show how you intend to repay the remortgage capital at the end of the term.
Who is eligible for an interest only remortgage?
As with any remortgage deal, you will need to check the lender's specific requirements and ensure that you are eligible before you apply for an interest only remortgage. When considering a remortgage application, mortgage lenders will look at factors such as:
- How much existing equity do you have?
- How much do you earn?
- How stable is your income?
- Do you have any outstanding debts?
- Do you have a good credit history?
Mortgage deals change daily, and with so many remortgage products on the market it’s difficult to compare them all. Use our FREE online mortgage calculator to search for deals and compare the whole of the UK remortgage market in an instant.