Can I change my mortgage to interest-only?

Key takeaways

• Switching from a repayment mortgage to an interest-only mortgage involves paying only the interest each month, leaving the capital debt unchanged.

• This can lower monthly payments but requires a solid plan to repay the principal debt at the end of the term.

• The Mortgage Charter allows a six-month switch to interest-only without an affordability assessment, providing temporary financial relief.

• An alternative could be to extend the mortgage term to lower payments, but this will increase long-term interest costs.

• Before making a decision, assess your financial situation and long-term goals, consult a financial advisor or mortgage expert and use mortgage calculators to understand your options.

For homeowners considering a shift in their mortgage structure, the option of switching from a repayment mortgage to an interest-only mortgage often surfaces.

But what does this entail, and is it the right move for you?

Understanding interest-only mortgages

Before diving into the specifics of changing your mortgage type, it's important to grasp the fundamental differences between repayment and interest-only mortgages.

Interest-only vs repayment mortgages

• Interest-only: Monthly payments cover only the interest on the mortgage. The capital debt remains unchanged, and you'll need a robust plan to repay the full mortgage amount at the end of the term.

• Repayment mortgage: You pay off both the capital and the interest each month. By the end of the mortgage term, you will have paid off the entire debt.

If your lender agrees, you could change your repayment mortgage to an interest-only mortgage. The first step is to ask your lender if this might be possible.

The mortgage charter: A six-month breather

The Mortgage Charter provides a lifeline for those in need of temporary financial relief.

Lenders that are signed up to the charter, representing 85% of the UK's mortgage market, may allow you to switch to an interest-only mortgage for six months without having to undergo an affordability assessment.

This means that, during this period, you would only be responsible for the interest part of your mortgage, potentially lowering your monthly outgoings significantly.

No affordability assessment under the charter

The charter's provisions are designed to offer a quick solution without the need for a rigorous financial review or impacting your credit file.

However, it's crucial to remember that after six months your mortgage will revert to its original repayment structure.

Making the switch: long-term considerations

If you are thinking of switching to an interest-only mortgage, you have to be prepared to show what method you’ll use to repay the lump sum. This could include: 

• Savings or investments

• Property assets

• Plans to downsize or sell the property in the future

Having substantial equity in your home can also sway lender approval in your favour.

Permanent change? Think about remortgaging

For those looking to switch to an interest-only mortgage for the long term, remortgaging might be the most viable route. 

This involves getting a fresh mortgage agreement, potentially with a new lender, but it allows for a permanent shift in its payment structure.

Evaluating the pros and cons

Switching to an interest-only mortgage isn't a decision to be taken lightly. Weigh up the following advantages and disadvantages:

Pros:

• An interest-only mortgage drastically reduces your monthly mortgage payments

• It offers short-term financial relief during tough times

• It allows for the potential investment of savings at a higher interest rate, which could be used to pay off the principal later

Cons:

• If you only pay the interest you won't build up more equity in your home

• You need to have a solid plan for repaying the mortgage's principal amount at the end of the term

Alternatives to an interest-only mortgage

If you're hesitant about switching to an interest-only mortgage, extending your mortgage term could be another option to lower monthly payments.

This alternative doesn't require an affordability assessment and can be reversed within six months.

However, it will lead to increased interest costs over time and could impact retirement plans for older borrowers.

Can you switch back?

Yes, reverting to a repayment mortgage is possible after the interest-only period, or after the six-month period under the Mortgage Charter.

Be mindful that monthly payments will be higher due to the time spent on the interest-only plan.

Making an informed decision

When considering a switch to an interest-only mortgage, it's essential to weigh your current financial situation against your long-term goals.

For more information on mortgage types and what might suit your circumstances best, explore What kind of mortgage can I get?

You can also use our mortgage repayment calculator to work out what your monthly repayments will be and find out how much you can borrow with our mortgage affordability calculator.

If you're struggling to keep up with mortgage payments, it's crucial to act promptly. For guidance on understanding financial challenges, check out What to do if you’re struggling to pay your mortgage.

Switching to an interest-only mortgage can offer a temporary reprieve or a strategic financial move, depending on your situation.

As with any significant financial decision, it's advisable to consult with a financial advisor or mortgage expert to ensure that the path you choose aligns with your financial health and goals.

Your home may be repossessed if you do not keep up repayments on your mortgage.