In 2013, interest-only mortgages were faced with new rules: new interest-only mortgages are no longer eligible for mortgage interest relief. Existing interest-only mortgages still. But what if you want to refinance your interest-only mortgage? And can you just take your interest-only mortgage if you move or not?
Take interest-only mortgage
You can always take your interest-only mortgage when you move to a new home. The part of your mortgage that you have now taken out without repayment retains the conditions that currently apply. For example, the mortgage interest and the fixed-rate period do not change if you include the interest-only mortgage.
If you move to a more expensive house, you may want to increase your mortgage to finance this higher amount. For this new part you have to take out an annuity mortgage or a linear mortgage if you want to use the mortgage interest deduction. If you choose to take out an interest-only mortgage for this amount, only this part of the mortgage will not be eligible for the mortgage interest deduction.
Instead of taking your repayment-free mortgage, you can also transfer it to a new repayment-free mortgage without affecting the mortgage interest deduction. The costs for the transfer are limited when you move, because you do not pay penalty interest. You do pay advice and closing costs and the costs for re-registering the mortgage in the registers of the Land Registry.
Whether re-transfer is advisable depends on whether the lower mortgage interest rate compensates for the re-transfer costs. Also keep in mind that you opt for a mortgage with good conditions, for example around extra repayments. This way you prevent that you will have to incur additional costs at a later time.
Mortgage repayment-free without relocation
You can always transfer your current interest-only mortgage to a new interest-only mortgage from your current bank or another bank, even if you do not move. However, sometimes you pay a penalty interest if you opt for this before the end of the fixed-rate period. So always check whether you are paying a penalty interest rate and how high it is for you to calculate whether the lower mortgage interest rate compensates for these costs.
Transfer interest-only mortgage to another mortgage type
In recent years, there has been a growing awareness that an interest-only mortgage is not always beneficial in the long term. You do not fully repay the mortgage loan, which means that you also continue to pay mortgage interest after the maximum period of 30 years for mortgage interest relief. Other mortgage types do not have this disadvantage.
However, switching over to an interest-only mortgage to another type of mortgage involves a number of snags. The monthly costs of an annuity mortgage or linear mortgage are higher than the monthly costs of an interest-only mortgage. You must be able to cope with this monthly increase in costs. In addition, in some cases you pay penalty interest and you pay advice and closing costs. A financial adviser can help you with this choice.
Taking an interest-only mortgage to a new home smart?
Whether or not it is smarter to take your interest-only mortgage with you when you move house depends on your current mortgage and the conditions of the new mortgage. Do you pay a lower interest rate with a new mortgage and does the bank apply better conditions? And does the saving outweigh the costs that you incur for the transfer? By working this calculation out well, you will soon see whether you can better take your repayment-free mortgage or take it over.