Remortgage Interest Only Mortgage
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Remortgage Interest Only Mortgage
We explore the options for remortgaging an interest only mortgage with Kevin Spear. Podcast recorded August 2023.
What is an interest-only mortgage and how does it differ from a repayment mortgage?
The clue’s in the name – interest only refers to the repayment style of the mortgage each month. It simply means that each month you purely pay back the interest owed. There’s no repayment of the underlying capital that has been borrowed.
If you never pay the capital down, at the end of the mortgage term you will still owe the same amount of money you borrowed on day one. From a budget perspective, however, an interest only reduces the amount of money leaving your bank account by a considerable amount.
With capital repayment mortgages, part of your payment reduces the capital that you borrowed. Another part of the monthly payment is the interest gained since you last made a payment.
Interest-only certainly has its place. In this podcast we are looking at why they have become a thing again in the residential borrowing world.
Can you explain the concept of remortgaging an interest-only mortgage?
We’re in August 2023 and in the last 12 months we’ve seen an exponential rise in interest rates, due to a number of economic factors. We’ve seen the base rate go from 0.1% up towards 5%.
So the interest-only mortgage is now coming into play to help people who are struggling to budget for their mortgage payments.
If someone took out a five-year fixed-rate mortgage five years ago, they may have got a rate of between 1.5% and 1.9% – but now a remortgage will be nearer 5%. This has created problems for people whereby they can’t afford their mortgage because the mortgage payment has doubled.
And if that has gone hand in hand with a change in their circumstances – either their pay hasn’t gone up much or it’s gone down, then we’ve got a problem.
What are the reasons why someone might choose to remortgage their interest-only mortgage?
At the moment, in August 2023, there’s a very specific reason why interest mortgages are back in play. It’s simply to help people manage their budgets. A remortgage after a very low fixed rate might take you to a rate of 4.5% or 5%. It could result in a mortgage payment that has doubled.
So interest only has been brought back to the market. The government and the Council of Lenders met about six months ago to discuss what to do on this particular issue. It was decided that lenders would bring back interest-only mortgages for a short time to allow people to stay in their homes and keep their mortgage payments up to date.
For example, a First Time Buyer who purchased five years ago and is now doing their first rate review, it’s pretty scary. But we can help you manage your mortgage payments. You can pay interest only for a while and then when interest rates come down – as they’re expected to do – there will be the option to convert back to capital repayment.
It’s deemed a short-term fix to help people who are struggling. It’s there to get them over the current bump in the road.
How do the interest rates on an interest-only remortgage compare to other types of mortgages?
The interest rates are no different. You’re not penalised because you can’t afford the current capital repayment mortgage.
The only difference is the style of the mortgage payment and how it’s made up. With an interest-only mortgage you’re literally just covering the interest element. We’re hoping that’s just for a period of a year or two. Then you can restructure and put a capital repayment. vehicle in place once rates drop.
We’re in an environment where future interest rates could be coming down. Certainly the pressures on inflation are coming down and it has dropped more quickly than expected. But these interest-only mortgages still have their place for people who are facing problems.
What factors should someone consider when deciding whether to remortgage to an interest-only mortgage?
The key thing is where people have a rate review and suddenly the mortgage has become very expensive or disproportionately high compared to their income.
They should consider getting in touch with a broker as quickly as possible. It can be tempting to put your head in the sand. There’s also the temptation to take that new rate on a capital repayment basis – but potentially experience quite significant financial hardship or even falling into arrears and impacting their credit record.
The main thing to consider at the outset is what the different options are. Can you get help? What can be done to help manage those payments? This has got more longevity to it – it’s not just crisis management. That’s the key consideration when looking at this. Talk to your lender or to a broker.
What are the potential risks or drawbacks of remortgaging to an interest-only mortgage?
The main risk is where someone does not renegotiate the repayment structure a couple of years down the road. If they remain on interest only, when they reach the end of the term in 20 years time or whatever that period is, they still owe the principal sum. That’s going to be tens of thousands if not hundreds of thousands of pounds.
This is definitely a short-term ‘sticking plaster’ for this particular period of time. It’s something to review at the earliest opportunity to get back on a repayment structure.
What options are available if someone is unable to remortgage?
This is where we as brokers come in. We can make a significant difference. Imagine a scenario where the mortgage payment has doubled and the five-year fixed interest rate is looking quite attractive. But people can’t manage that payment.
Here’s where the interest-only option comes in. Your broker will approach the lender to explain the current situation and how in a couple of years’ time you can go back to a repayment structure.
These things are looked at on a case-by-case basis – that’s why it’s important to engage with a broker for expertise and help.
Another option that we will look at first is to extend the mortgage term to make that payment more manageable. Say someone took a 25 year mortgage five years ago. They’ve got 20 years left to pay, but they’re still only in their 30s. That mortgage can be extended by quite a margin, which makes a significant difference to the monthly budget.
Yes, the downside is we’re extending the term, but it’s making the payment manageable and it’s still on a repayment profile. That debt is still going down. It can be revised and shortened again on the next mortgage review.
We will always examine that scenario first because it keeps the repayment mortgage profile in place rather than going to interest-only.
Can you explain the process of remortgaging an interest-only mortgage?
It’s case by case. The lenders have had this directive from the government to help people – they have a duty of care and they must offer the interest-only solution in the short term.
But it’s not a prerequisite. Lenders want to be assured that the individual borrower is aware of the risks and is committed to adopting a repayment structure as soon as possible.
They will review this on a case-by-case basis rather than it being an automatic sign off.
How can someone find the right remortgage deals for interest-only mortgages?
Talk to your broker. It’s as simple as that. Most lenders are following the requirement to offer an interest-only solution. Typically the mortgage will remain with the lender that currently has the debt. Your broker can help make that happen. So talk to us – the key thing here is not to do the ostrich thing and put your head in the sand!
What advice do you have for individuals who are considering remortgaging to an interest-only mortgage?
We’ve seen in the press that it is being talked about within government and at the highest levels of the Council of Lenders. Lenders are doing these deals, but they are not widely advertised.
Lenders don’t necessarily want to be flooded with these applications because potentially it’s storing issues up for them in the future. But they are available. It’s just a question of finding your way through – the easiest way to do that is with your mortgage broker.
Having an intermediary in the middle can take the emotion out of it from the borrower’s perspective. We present the case to the lender in a way that helps them come to a decision quickly.
So don’t ignore it. That’s the main thing. The other thing is to be aware that you must commit to a repayment structure down the road. I’ve seen a lot of people in recent years who had endowments 20 years ago and stopped paying them. But they never converted that interest-only mortgage across to repayment.
Now around 600,000 interest-only mortgages are ending every year and the lenders want their money back. We’re having to remortgage people in their late 50s and early 60s because they stopped saving to repay their mortgage 20 years ago.
So we must make sure that people don’t do that. But equally, we must make sure that people can access this solution to stay in their current home.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up with your mortgage repayments.
You may have to pay an early repayment charge to your existing lender if you remortgage.
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