Remortgaging interest only

jaymse

Hi All,

I have a query on how interest only remortgages work.

Heres a scenario: Suppose you are purchasing a £150k BTL property at 50% LTV (borrowing 75k) for 25 year term on an interest only mortgage at 5.89% for the first five years. If after the five years you decide not to go on to the SVR, and your current lenders new fixed rates are higher than 5.89% and not competitive so you decide to remortgage with another lender at a deal that lets suppose is at 5.89%. Let's also suppose the property markets have stagnated and so your property value is still £150k. 

would it make sense not to remortgage this because although you may get a better rate than your current lender, you will have to remortgage the 75k and start interest only payments from square one again because it was an interest only mortgage and not a repayment mortgage (where you would have paid down some capital over the five years)? 

I dont understand how the remortgaing would work here because wouldn't you have lost out on the first 5 years of interest payments you have made as you are restarting from the beginning again on a new interest only remortgage? 

So basically should you only ever remortgage an interest only loan if after your fixed rate comes to an end, your property value has comfortably increased or if other lenders are offering rates substantially below what your current lender can provide? I'd suspect it would have to be much lower considering you've paid 5 years worth of interest that would just go down the drain when you remortgage and start again?

MultiFuelBurner

You will pay interest for as long as you own the property if you do not pay off any capital. You will always owe £75k.

Historically house prices will always rise and 5 years from now with the lack of building and demand there is no reason to not expect this. So you should have a better LTV loan to value when you come to rearrange the interest only mortgage in 5 years time but you will still owe £75k. Remember to deduct capital gains tax from the increase in the property price.

housebuyer143

jaymse said:

Hi All,

I have a query on how interest only remortgages work.

Heres a scenario: Suppose you are purchasing a £150k BTL property at 50% LTV (borrowing 75k) for 25 year term on an interest only mortgage at 5.89% for the first five years. If after the five years you decide not to go on to the SVR, and your current lenders new fixed rates are higher than 5.89% and not competitive so you decide to remortgage with another lender at a deal that lets suppose is at 5.89%. Let's also suppose the property markets have stagnated and so your property value is still £150k. 

would it make sense not to remortgage this because although you may get a better rate than your current lender, you will have to remortgage the 75k and start interest only payments from square one again because it was an interest only mortgage and not a repayment mortgage (where you would have paid down some capital over the five years)? 

I dont understand how the remortgaing would work here because wouldn't you have lost out on the first 5 years of interest payments you have made as you are restarting from the beginning again on a new interest only remortgage? 

So basically should you only ever remortgage an interest only loan if after your fixed rate comes to an end, your property value has comfortably increased or if other lenders are offering rates substantially below what your current lender can provide? I'd suspect it would have to be much lower considering you've paid 5 years worth of interest that would just go down the drain when you remortgage and start again?

I'm not sure I understand. You borrow £75k, your house value goes up t0 £250k, you still owe £75k. 
You pay the mortgage for 10 years and decided to remortgage for a better rate, you still owe £75k so you remortgage that amount. Whether the property value increases or decreases doesn't matter at all as you just remortgage the loan you originally took out. 

The mortgage term doesn't matter on interest only as the payments are unchanged over 5 or 40 years because you are not reducing the loan. You could go to a new lender and take out a 5 yr loan and the payments would be the same if you used to be on 35 years with your old one.

As with any mortgage you would only remortgage it when the new rate is lower. It being interest only doesn't change when or why would do this. At the end of the chosen term you pay the lender back their 75k.
You basically rent from the bank which is another way to think of interest only.