Can I change my mortgage to interest-only?
Looking to change your mortgage to an interest-only product? Read on and we’ll explain what switching to an interest-only mortgage means, how you can do it, and what impact it will have.
Can I change to an interest-only mortgage?
In most cases, yes, you can change your repayment mortgage to an interest-only mortgage. In order to do so, you’ll need to contact your lender and ask them if it’s possible.
Under the government’s Mortgage Charter, lenders which have signed up will offer you the chance to switch to interest-only for six months. This will mean you only pay off the interest on your mortgage, lowering monthly payments in order to give you some financial breathing space in the short term.
The good news that if you want to do so under the charter there is no affordability assessment and there should be no impact on your credit file. Your mortgage will revert to a repayment mortgage once the six months is up.
If you want to change to an interest-only mortgage and are not in financial difficulty, it’s also possible, but you will need to show to lenders that you have a plan to repay the mortgage itself when the term ends. This may be in the form of savings, an existing lump sum or a buy-to-let property. If you have high equity in your home already, lenders will be more likely to approve a switch to an interest-only mortgage in such cases.
Meanwhile, if you want to switch to an interest-only mortgage permanently, your best option is to remortgage.
What is the difference between an interest-only and repayment mortgage?
Interest-only: With an interest-only mortgage, you only have to pay back the interest on the loan every month. While this means much lower monthly repayments, you must have a plan to pay back the entire mortgage once the mortgage term ends, and show this to a lender, if you are not switching under the Mortgage Charter.
Repayment mortgage: A repayment mortgage is the most common mortgage type. It means repaying part of the overall debt (also known as the capital), as well as interest, each month. Repayment mortgages are either fixed-term deals in which the interest rate is set for a set period (usually two, five or 10 years), or variable rate deals, when the interest rate changes depending on the base rate set by the Bank of England (BoE).
What will my mortgage provider need before I switch to an interest-only mortgage?
If you are switching to an interest-only mortgage to ease your financial situation under the government’s Mortgage Charter, all you need to do is call your lender. If they are signed up to the charter, they do not need to do an affordability assessment and will let you switch to an interest-only mortgage for six months. This will mean you revert to a repayment mortgage after that period elapses.
If you want to switch to an interest-only mortgage for the long term, then you will need to show your lender a clear plan for you to pay back the money once the mortgage term ends. You will need proof that you are either paying enough into a savings account, already have a lump sum set aside, are earning from a buy-to-let property, or have a plan to sell your home once the term ends and therefore pay off the mortgage with the proceeds.
In this case, lenders will also carry out a credit check and full affordability assessment, as well as considering your loan-to-value ratio. The greater the equity in your home, the more likely they are to approve your request.
Should I change to an interest-only mortgage?
Massively lowers your monthly repayments
Gives you greater financial breathing space in the short term
Make money by placing funds into high-interest savings, allowing you to build up a fund to pay off the principal amount at the end of the term
Equity builds up more slowly - repayments won’t go towards building up equity, which will only rise if the overall value of your home goes up
Need a plan to pay off the mortgage at the end of the term
What are the alternatives to switching to an interest-only mortgage?
If you are struggling to pay your mortgage, you have the option of extending your mortgage term under the government’s Mortgage Charter. This is an alternative to switching to an interest-only mortgage for six months.
As with asking for an interest-only plan, the Mortgage Charter says you can extend your term without an affordability assessment. This means you’ll have longer to pay back your mortgage, slashing monthly payments in the process. You can switch back to your previous term within six months, with no questions asked. Doing so for the long term means you will pay more in interest, however, and can impact retirement plans if you are older.
Can I change back to a repayment mortgage later?
Yes. When your mortgage term is up you can switch back to a repayment mortgage, although your monthly repayments will be higher as you will have only paid interest.
You can change back to a repayment mortgage after six months under the Mortgage Charter too.