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.
Key takeaways
Switching from a repayment mortgage to an interest-only mortgage involves paying only the interest each month, leaving the capital debt unchanged, his can lower monthly payments but requires a solid plan to repay the principal at the end of the term
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, which can be reversed within six months but may 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 can often change your repayment mortgage to an interest-only mortgage. To initiate this switch, reaching out to your lender is the first step.
The mortgage charter: A six-month breather
The government's Mortgage Charter provides a lifeline for those in need of temporary financial relief.
Lenders that subscribe to the charter may permit a six-month transition to an interest-only mortgage without an affordability assessment.
This means during this period, you're only responsible for the interest portion 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're contemplating a switch to an interest-only mortgage outside of immediate financial hardship, be prepared to present a repayment strategy. 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 make a lasting change to an interest-only mortgage, remortgaging might be the most viable route.
This involves a fresh mortgage agreement and potentially a new lender, but it allows for a permanent shift in payment structure.
Evaluating the pros and cons
Switching to an interest-only mortgage isn't a decision to be taken lightly. Consider the following advantages and disadvantages:
Pros:
Drastically reduces your monthly mortgage payments
Offers short-term financial relief during tough times
Allows for the potential investment of savings at a higher interest rate, which could be used to pay off the principal later
Cons:
Slows down the pace of building home equity unless property values rise
Necessitates a solid plan to repay the mortgage's principal amount at the end of the term
Alternatives to consider
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 may 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 out 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.
Does it affect my life insurance?
If you want your life insurance pay out to be enough to cover your mortgage, the way you choose to pay off your mortgage should not affect your policy. As long as your life insurance affects the amount of your entire mortgage.
Our other useful guides
Your home may be repossessed if you do not keep up repayments on your mortgage.
