How interest-only mortgage payments are worked out
The formula, monthly payments for common loan sizes, the comparison with repayment, and the savings needed to clear the loan.
When you remortgage, how much you can borrow comes down to two limits: how much the lender will lend against your home, and how much your income can support. The lower of the two is your answer. Both start with your loan to value.
Working out your loan to value
Loan to value (LTV) = mortgage balance ÷ property value × 100.
Owe £210,000 on a home worth £300,000: £210,000 ÷ £300,000 = 0.7, so 70% LTV. Your equity is the other 30%, £90,000.
Use a realistic value. The lender will order its own valuation, and if it comes in lower than you expect, your loan to value goes up.
Why the bands matter
Lenders price their deals in loan to value bands, commonly 60%, 75%, 80%, 85% and 90%. The lower the band, the better the rates tend to be. Crossing into a lower band, by paying some off or because your home has gone up in value, can cut the rate you are offered.
| For a £300,000 home | Balance at the top of the band |
|---|---|
| 60% LTV | £180,000 |
| 75% LTV | £225,000 |
| 80% LTV | £240,000 |
| 85% LTV | £255,000 |
| 90% LTV | £270,000 |
The loan to value and equity calculator shows your band, how much you would need to pay off to reach the next one, and where your loan to value is heading as you make payments.
How much can you remortgage for?
Limit 1: the lender's maximum loan to value
Each lender caps how much of your home's value it will lend. Multiply the value by that cap. On a £300,000 home with an 85% cap, the most you could borrow in total is £255,000.
Limit 2: your income
Lenders also check affordability, usually starting from a multiple of income. Many lend up to about 4.5 times income, and take off what you already pay on other credit. On £50,000 of income at 4.5 times, that is up to £225,000.
Putting them together
| Example | Amount |
|---|---|
| Home value | £300,000 |
| Current mortgage | £150,000 (50% LTV) |
| Limit 1: 85% of value | £255,000 |
| Limit 2: 4.5 × £50,000 income | £225,000 |
| Most you could borrow (the lower) | £225,000 |
| Extra you could raise | £75,000 |
In this example income is the tighter limit. Borrowing the full £225,000 would also take you from 50% to 75% loan to value, which can mean a higher rate than you pay now. The lender will want to know what the extra money is for, and lending for home improvements is usually more straightforward than for other uses.
Is switching worth it?
Most remortgages are not about borrowing more, but about leaving a lender's standard variable rate when a deal ends. Here is an example using our remortgage calculator.
| £200,000 with 23 years left | Stay on 7.5% | Switch to 4.5% |
|---|---|---|
| Monthly payment | £1,522.78 | £1,164.44 |
| Paid over two years | £36,547 | £27,947 |
Over a two-year deal the lower payments save about £8,600. More of each payment also goes off the loan at the lower rate, so the balance ends about £3,350 lower. Take off a £999 arrangement fee and switching comes out about £10,950 ahead. The rates here are examples only; use the rates you are actually offered.
Costs to check before you switch
- Early repayment charges if you leave a deal before it ends.
- Arrangement fees, and whether adding them to the loan means paying interest on them.
- Valuation and legal costs. Many remortgage deals include these, but not all.
The remortgage calculator includes all of these and shows how long it takes for the saving to cover the costs. If you are also wondering how a Bank of England rate change would affect you, see how a rate change hits your mortgage payment.
This is general information, not financial or tax advice.
It explains published rules and figures. Your own position depends on your full circumstances,
so speak to a qualified adviser before acting on it.