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Change repayment to interest only

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 6, 2023

Change repayment to interest only

You may be considering switching from a capital repayment mortgage to interest only. But is it possible?

This article will discuss the options for switching to an interest-only mortgage, the factors to consider, and the best ways to get the best rates.

Contact us today to speak with a specialist mortgage broker. We have a free broker matching service and offer no obligation mortgage advice.

We have a few mortgage providers lending who we can then introduce. Our mortgage brokers are the top market financial advisers. We can explain monthly repayments, your mortgage term and any other questions you may have.

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Is it possible to convert your mortgage to interest only?

This is possible with most mortgage lenders, provided you meet their criteria for interest-only mortgages.

  • It is essential to have a solid repayment plan (a way to repay the balance). You can find more information on possible acceptable strategies in our interest-only mortgage repayment vehicles guide. Keep in mind that not all lenders will accept every type.
  • LTV (loan-to-value) rates for interest-only mortgages are generally lower than those for repayment mortgages. Therefore, you will need enough equity in your home to meet the lender’s minimum equity requirements.
  • For interest-only mortgages, many lenders require a higher income (typically £75,000 to £100,000.) To switch to them, you will likely need to meet this minimum income requirement. However, some lenders do not require a minimum income.
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Do you need to remortgage your home?

It depends on the existing mortgage provider. Lenders do not consider changing the repayment method to be refinancing. It is possible to keep your current deal and change to interest-only repayments. You should clearly state whether or not this is possible in your terms and conditions. If you are unsure, you can speak with your lender directly.

Remortgaging: Why might you need it

You have a few options.

  • Unavailable – If your lender doesn’t offer interest-only mortgages or does not allow customers the opportunity to change repayment types.
  • Ineligibility – If your current lender has a strict interest-free mortgage policy, you may be eligible to remortgage with a lender that meets your needs. An expert broker in this field can help you locate one.

If your current mortgage lender does not offer a flexible interest-only deal, such as one that allows for regular, penalty-free overpayments, you might consider remortgaging. You can use these bonuses to reduce your capital owing, which could benefit people with fluctuating incomes or who receive bonuses.

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Is it possible to temporarily switch to interest-only?

Temporary switches to interest-only payments may be possible with some lenders. This can be beneficial during times of financial difficulty. Although this is common, lenders will allow short-term repayment changes of between 1 and 2 years. However, the exact amount may vary from one lender to another.

You can remortgage to get an interest-only deal if you decide you need it. However, you could still remortgage to a repayment plan later.

What will happen to your repayments?

Use our mortgage calculator to calculate how much you could save when switching from a capital repayment mortgage.

Although the calculator defaults to repayment by default, once you have entered your data, you can change the tool to interest to compare the results.

Keep in mind that while you may make short-term savings on your monthly payments, interest paid over the entire term of an interest-only mortgage is higher than the equivalent capital repayment mortgage. This means you will end up paying more overall.

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How a broker can assist you in your switch

You must have a suitable repayment mortgage plan. Interest-only mortgages can be more complicated. A professional interest-only mortgage advisor like the ones we have will be able to help you thoroughly explore the options and make the best decision for you.

Many lenders offer interest-only deals through intermediaries. Brokers often have access to deals you wouldn’t find on your own, as many lenders don’t provide these deals directly. If you cannot meet your lender’s income or equity requirements, brokers may be able to match you with a better lender.

Your existing lender may be able to accommodate your switching to interest-only repayments. However, they might not offer the most competitive rates and flexible terms. A specialist broker can help you get the best deal possible.

What lenders permit you to switch to interest-only?

Most lenders will allow you to modify your repayment type. However, some lenders won’t. Nationwide, the UK’s largest mortgage provider, won’t allow you to change your repayment type from interest-only to repayment. Still, they allow customers to switch between interest-only and repayment mortgages.

Lenders that can accommodate a switch will often charge a small administration fee and will conduct checks to make sure you meet the criteria.

These major lenders permit this change and the associated fees and criteria.

  • Santander – Fee of £75 payable. Maximum LTV of 50 %
  • Halifax – Repayment plan evidence required
  • Lloyds – Maximum LTV 75%. You will need to provide proof of repayment plan.
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Before you switch

Switching to an interest-only mortgage is a great way to reduce your monthly payments compared to a capital loan mortgage. There are some essential things to remember when considering this type of change.

  • If you change to interest-only, your loan capital will not be reduced. This means that your remaining balance will remain outstanding at the end regardless of its amount.
  • You may have to pay fees to switch your repayment type. This is especially true if you have any early repayment fees on your terms.

There are alternatives to switching

Most people who switch to interest-only payments do so in the hope of saving money on their monthly outgoings. There are many other options for those who can’t afford their capital repayment mortgage.

Enjoy a vacation with your mortgage

A flexible mortgage will often include the ability to take a holiday. This is often referred to as a pay freeze or deferral and can be allowed for around three months. However, in this instance, the unpaid mortgage months will be added to your mortgage balance. Your monthly payments will likely be slightly higher once you start paying again.

Some lenders will grant short payment holidays, regardless of your agreement terms. This was quite common in the early days of the pandemic in 2020. You may be able to lower your payments rather than stop them completely, but most lenders won’t agree to this for very long terms.

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Your current mortgage term can be extended

Your monthly payments will be reduced if you don’t increase the amount of your borrowing. The remaining balance is spread over a more extended period. Your age and the maximum term limits may affect whether your lender will make this change. However, they can still do so at their discretion.

Remortgage at a better or longer-term rate

You may be able to remortgage your mortgage to another lender if your current lender doesn’t extend your mortgage term. Remortgaging for lower interest rates with your current or a brand new lender could be an option. This will reduce your monthly payments even if the term cannot be extended.

Part and part mortgages

Some lenders will offer a partial-and-part repayment arrangement if you cannot meet the requirements for an interest-only switch. This is a combination of interest-only/capital repayment. Although the LTV might be higher in this instance, the equity requirement will be easier to meet. However, the lender will still require proof of a solid repayment plan, even though it may be lower overall.

Match with an interest-only mortgage expert

A broker who is an expert in interest-only mortgages will be able to help you locate the correct lender if you are considering switching to one. They can help you find other ways to reduce your monthly mortgage payments if you cannot fulfil the interest-only mortgage criteria.

The broker matching service is free and will connect you with a broker with the knowledge and experience necessary to help you find the solution you are looking for. To start your no-obligation-free chat with us, enquire here today.

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Switching to interest-only mortgage FAQs

Is it possible to get a fixed rate interest-only mortgage

Interest-only mortgages are just like capital repayment. They can be either fixed-rate or variable. Fixed-rate mortgages with longer terms typically have higher rates than those 1, 2, or 3 years. However, some prefer this security because the interest you owe won’t decrease over the mortgage term.

Can I remortgage an Interest-Only Mortgage?

It is possible to remortgage on either an interest-only or capital repayment mortgage. However, your monthly payments may increase.

It’s easier to fall in negative equity with an interest-only mortgage, as you don’t gain equity through repayments. Your equity level will be determined solely by the current market value and whether it is higher or lower than when you purchased it.

What if I am on maternity leave and want to switch to interest-only?

Although it is possible, most lenders will require proof that you can afford the repayments and evidence that your maternity leave ends. You will also need a reliable repayment vehicle.

You may be able to switch to this lender by contacting a specialist lender. The brokers we work with can help you find suitable mortgage lenders.

Contact us now for expert interest-only mortgage advice.

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