Can I extend my interest-only mortgage term?
By
HuutiMoney
Can I extend my interest-only mortgage term?
Yes, you may be able to extend your interest-only mortgage term and this will give you a longer term to save up the capital repayment needed at the end of the mortgage term. Switching your interest-only mortgage term will also give you timeto decideif to switch to a repayment mortgage, if possible.
Most people always wonder if it would be possible to extend their interest-only mortgage term. In most cases this is possible and simply requires an application to the mortgage lender.
Before looking to extend your interest-only mortgage you should consider if you can reasonably continue to make these monthly mortgage repayments which are interest-only and will not change throughout the term of your interest-only mortgage.
The mortgage lender will want to see that you can afford the additional monthly mortgage repayments comfortably and if you cannot then they will likely not agree to an extension of your interest-only mortgage term.
This isn’t the end of the world though. There may still be some mortgage lenders out there who are happy for you to extend your interest-only mortgage term with them if you meet their mortgage affordability requirements.
If you are an older borrower then you may find it harder to extend your interest-only mortgage and may want to consider alternative options.
This is because most mortgage lenders will usually like to see that borrowers have reached the end of their mortgage term by the time they are 75.
There may still be mortgage lenders who are willing to extend an interest-only mortgage term for a borrower who is approaching 75 but you may need the help of a specialist mortgage broker to help you find suitable lending options.
interest-only mortgages will usually require a 25% mortgage deposit as most mortgage lenders may be willing to offer loan to value rates of 75% or even more.
interest-only mortgages are mortgages where your monthly repayments cover only the interest being charged on the balance outstanding. This means you make no repayments to reduce the balance outstanding. The balance outstanding is then paid back at the end of the mortgage term in one large sum.
interest-only mortgages are different to capital repayment mortgages as the monthly mortgage repayments on capital repayment mortgages contain both an interest element and a capital element. By the end of a capital repayment mortgage term, the balance outstanding will usually have been paid in full.
Most mortgage borrowers choose interest-only mortgages as the monthly mortgage repayments tend to be cheaper than on a similar capital repayment mortgage.
Yes, you can overpay on your interest-only mortgage. This overpayment will go towards reducing the balance that is owed which you would have had to pay back at the end of the mortgage term with your repayment vehicle. This means that your monthly mortgage repayments which are made up of only the interest charged on your balance will reduce.
You may be able to get an interest-only mortgage from between 5 and 40 years.
The usual term will be around 25 years but you may be able to find mortgage lenders who will lend from 30 to 40 years on an interest-only mortgage but you will, of course, need to fit their mortgage affordability and lending criteria.
If you plan to extend your interest-only mortgage term with the same lender you are currently with then this may be somewhat beneficial as you may avoid paying any early repayment mortgage fees and as the mortgage lender already has an established relationship with you, you could find that extending your interest-only mortgage with the same mortgage lender moves quicker.
The mortgage lender will already have details of your repayment vehicle and may already have conducted a periodic review of your repayment vehicle. They may be more willing to extend your interest-only mortgage term if the issues you are facing aren’t considerable and they could understand how things may be able to improve in the future.
When extending your interest-only mortgage term with the same lender, the lender may be able to recommend other borrowing options that could potentially work for you if they aren’t able to approve you for an extension on your interest-only mortgage term.
When extending your interest-only mortgage term with a new mortgage lender, this is essentially getting a remortgage with a new mortgage lender who will onboard you as a customer.
For your interest-only mortgage to be extended with the new mortgage lender you will need to meet their minimum income requirements and show that you can continue to afford these mortgage repayments till the end of your new mortgage term.
You may have to pay an early repayment fee to get out of your previous interest-only mortgage and the mortgage lender will want to see your repayment vehicle and how you intend to repay the capital balance at the end of the mortgage term.
The repayment vehicles that are commonly accepted by interest-only mortgage lenders include:
Sale of a second property
Stocks and Shares ISAs
Investment Bonds
Pension Funds
Investments
Stocks and shares
Endowment policies
If you want to extend your interest-only mortgage and you have bad credit you may find it difficult to find interest-only mortgage lenders who will let you extend your interest-only mortgage term if you have bad credit.
Mortgage lenders all have different criteria on how they deal with bad credit. It all depends on your individual circumstances. Some mortgage lenders may accept a CCJ and others may not accept a CCJ.
Bad credit could include:
A CCJ
An IVA
A debt management plan
A default
A bankruptcy
A home reposession
When considering bad credit mortgages you may want to seek a bad credit mortgage broker who may be able to find mortgage lenders who will want to extend your interest-only mortgage term.
You should always check your credit score and look to reasonably build credit before applying for a mortgage.
If you are self-employed and you want to extend your interest-only mortgage term then this may be much more difficult as self-employed borrowers often find it harder to get a mortgage as they are unable to prove their income or the stability of their income to the mortgage lender.
As a self-employed borrower, you will want to show the interest-only mortgage lender that you have a stable and reliable income. You will also want to show the mortgage lender that you haven’t had long gaps in employment due to not being able to find a job or something similar.
interest-only mortgage lenders will also pay huge attention to your repayment vehicle to ensure that it could be able to pay back the mortgage balance at the end of the term and it has little dependence on your income.
As a self-employed borrower you will be expected to provide the following documents:
Your annual accounts
Your bank statements for at least 3 months
Your SA302 tax calculation form
If you are looking to extend your interest-only mortgage term then you may want to seek the advice of a self-employed mortgage broker.
Reasons why you may want to extend your interest-only mortgage term
Most people may want to extend their interest-only mortgage term because their repayment vehicle isn’t performing very well and they want to buy more time in order for the repayment vehicle to start performing as expected.
The issue with this is the cost of time. As mortgage borrowers extend the interest-only mortgage term they will also, of course, have to make their monthly mortgage repayments which include only interest for that additional term. This could potentially end up costing thousands of pounds per year.
Some may say this funds could have been put towards paying off the capital balance rather than buying time by extending your interest-only mortgage term.
The first thing you should always do when seeking to extend your interest-only mortgage term is to speak to your mortgage lender who could potentially be able to assist you.
Depending on why you may be trying to extend your interest-only mortgage term there may be other options which you could potentially make use of.
Switch to a part and part mortgage
If you are trying to extend your interest-only mortgage term because you are currently unable to make the capital repayment at the end of the interest-only mortgage term then you may want to consider switching your mortgage to a part and part mortgage so some of your monthly mortgage repayments start to reduce your capital balance.
You should be aware that because there is still an interest-only mortgage portion of the part and part mortgage the mortgage lender will still want to review and approve your capital repayment vehicle and if it is currently underperforming you may not be able to get a part and part mortgage as an alternative to extending your interest-only mortgage term.
Switch to a capital repayment mortgage
You may also be able to switch your interest-only mortgage to a capital repayment mortgage but in any case, the mortgage lenders will want to ensure you can still make the monthly mortgage repayments and perform their mortgage affordability tests.
Get an interest-only offset mortgage
If you have savings then you could potentially use your savings to offset the amount of interest you may have to pay every month with an interest-only offset mortgage. This could potentially mean that you could save the difference between what you pay every month and what you would have been paying in the past without the interest-only offset mortgage and use this to make an overpayment on your mortgage which reduces the capital balance owed.
Use your savings to overpay
You could also simply use your savings to make an overpayment which reduces the capital balance owed. Some interest-only mortgage lenders may have limits as to how much you can overpay each year.
Downsize your property
You can also sell your home and move to a much smaller and cheaper home. This will allow you to use the money gained from selling your home (excluding the cost of a new home) to pay off some of the balance of your interest-only mortgage.
You should consider if you will be eligible for a new mortgage with the same lender or a new lender for your new property and consider the mortgage costs and other costs involved with buying a new home such as stamp duty.
Remortgage to a lower rate and overpay
You may be able to remortgage to a cheaper interest-only mortgage. This will reduce the amount you have to pay as a monthly mortgage repayment each month and will leave you with savings which you can overpay with or put aside to help you repay your balance at the end of the mortgage term.
Switch to a retirement interest-only mortgage
A retirement interest-only mortgage will be a viable option if you are above 55 and are struggling to find any mortgage lenders willing to extend your interest-only mortgage term.
With a retirement interest-only mortgage you pay a fixed monthly rate per month which is the interest charge on your balance but you do not have to repay a balance at the end of the mortgage term as the balance is recouped by the mortgage lender when you die or move into a care home.
Switch to an equity release
You may not be able to use most of their mortgage options we have listed here due to your age but if you are over 55 then you may be able to switch to an equity release plan.
With an equity release plan, you will not need to make any repayments but you could make some repayments towards the interest being charged if you wanted to.
The capital owed is usually paid when you die or move into a care home.
Get a payment break or holiday
Finally, you could potentially ask the mortgage lender to give you a payment holiday or break. This could mean you make no repayments for a fixed period of time.
You should speak to a mortgage broker about your current circumstances and why you may be considering extending your interest-only mortgage term.
A mortgage broker may be able to provide you with guidance on what steps you should take.
You should really only extend your interest-only mortgage term if you are sure you can continue to make the monthly mortgage repayments and afford to pay off the capital balance at the end of the mortgage term.
Yes, some mortgage lenders may be willing to give you an extension on your interest-only mortgage but you will usually have to pass their mortgage affordability tests and they may also scrutinize your repayment vehicle to ensure it will still be able to pay off the mortgage balance.
If you need a short term interest-only mortgage then you may be better of taking an interest-only loan which could provide you with access to funds. You could then repay the interest-only loan in part or full once you have access to capital.
Bear in mind that some interest-only loans will have early repayment charges.
Interest-repayment loans could be considered a good short term option if you have capital that you cannot utilize at the moment. E.g investments but need to get on the property ladder as soon as possible.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.
