Switching to an interest-only mortgage

Countless individuals have yet to grapple with the stark reality of escalating interest rates. This scenario will shift dramatically for approximately 1.4 million people whose fixed deals will conclude during 2023. The majority of these deals were initially locked in at under 2%. Some homeowners facing a remortgage deadline this year may be considering switching to an interest-only mortgage to cut costs.

This option allows borrowers to pay the interest that accumulates on the loan without paying off the balance. However, it’s important to note that this comes with a certain level of risk.

CURRENT MORTGAGE PAYMENTS

Interest-only mortgages became more restricted after the 2008 financial crisis. However, some lenders recognise that these loans can offer flexibility to the right customer. But the eligibility requirements for these mortgages are typically stricter than for other products, as borrowers need to show a solid repayment strategy for the loan balance.

An interest-only mortgage could lower your monthly payments, making it a viable option if you struggle to afford your current mortgage payments due to a significant rise in rates.

This option also appeals to those with a large amount of capital, as it could free up cash that could be invested elsewhere, potentially leading to profits that could be used to repay the mortgage.

Despite these potential benefits, there are drawbacks to consider. One is that your overall interest payments over the life of the mortgage will be higher than if you had a repayment product.

REPAYMENT STRATEGIES

If you are considering changing your existing mortgage to interest-only, most lenders have specific criteria you must meet. They’ll want to know how you plan to pay off your mortgage balance at the end of the term.

This could be through savings, investments, pension funds or any other reliable method. Keep in mind that not all repayment strategies are accepted by all lenders. The Loan-to-Value (LTV) rate on interest-only mortgages is often lower than on repayment mortgages. This means you will need substantial equity in your property to meet most lenders’ minimum equity requirements.

MINIMUM INCOME REQUIREMENT

Additionally, many lenders set higher minimum income requirements for interest-only mortgages, typically ranging from £75,000 to £100,000. You will likely need to meet this requirement to switch to an interest-only mortgage. However, some lenders do not have a minimum income requirement.

There’s no universal approach that fits all. Some homeowners may be willing to pay a higher amount for a fixed rate, as they prioritise stability above all. Conversely, some people will be eager to minimise their payments as much as possible.

Don’t forget, our professional friendly advisers are on hand to support you and can help you explore all of your options.