Updated: March 01, 2022

Switching to an Interest-Only Mortgage

Considering switching to an interest only mortgage (even temporarily)? It can be done! Find out the pros, cons and exactly how to do it in our expert guide.

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No impact on your credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: March 01, 2022

For some people, switching from repayment to an interest only mortgage can be a useful option to explore, even just as a short term measure to give you extra flexibility and make your monthly payments more affordable.

In this article we’ll look at why making this move could be the right choice for you, explore all the alternatives available and how our free broker matching service can help you get the best deal.

What are you looking for?

Can you switch from repayment to an interest only mortgage?

The short answer is yes, it’s possible. As with any new mortgage, you’ll need to meet the lender’s eligibility requirements and, specifically for interest-only loans, you’ll require a viable repayment plan in order to prove you can cover the original capital amount borrowed.

Due to the unique way the capital is repaid, interest-only mortgages are viewed by lenders as more of a risk than the full repayment method and can end up costing you more over the full term of the loan.

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Benefits of switching

There are many reasons why you might want to switch to an interest only mortgage, including increased flexibility and short term affordability.

One of the main benefits is that the monthly repayments will be much lower than a capital and repayment mortgage, as you’re only paying off the interest each month and not the capital. So, if you’re struggling to meet your current repayments a switch across to interest-only could be the right move for you.

Some people also like the idea of being able to choose how, when and by what method they repay back to the lender the original amount borrowed. This gives them the freedom of looking at alternative methods to generate cash to pay the mortgage off which could, by the end of the mortgage term, have also made them more money than was required

Switching mortgage repayment methods is an important choice and one that shouldn’t be rushed. Rather than trying to do this on your own, the smart move is to consult with an experienced mortgage broker first. They will outline all the pros and cons before you make your final decision.

Things to consider before switching

Switching from a repayment to an interest only mortgage is a big decision. Here are a few things you’ll need to think about before you make the change.

Make sure you have a clear repayment strategy

The key thing to consider when switching to interest only is what your repayment vehicle is going to be. This isn’t as scary as it sounds, you just need an effective plan for paying back the capital on your loan at the end of your mortgage term.

A lot of people will look to use the profits from selling their property at the end of the term but other acceptable repayment vehicles include savings and investments, like ISAa, stocks and shares, pensions, or the sale of other assets such as a second home.

Different lenders will have different criteria about the exit strategy you could use but none of them will agree to an interest only mortgage without being sure you have a suitable plan in place.

Speak to an interest-only mortgage broker

Before thinking about approaching a lender, speak to a mortgage broker about what you want to do and why. They’ll be able to support you through the process and help you avoid any potential pitfalls.

The advisors we work with have a huge amount of experience and knowledge of these types of mortgages and will be able to identify the right lenders, offering the best deals, to suit your circumstances. Make an enquiry and we’ll arrange for a specialist to contact you straight away.

Download your credit records

Any potential lender will want to know about your credit history, but don’t panic if you’ve had financial problems in the past. While it may put some lenders off, others have more flexibility and can take into account the nature of the credit issue and how long ago it happened.

The best thing to do is download your credit reports beforehand so you can review your scores to see how things look. If there’s any incorrect or out of date information on there you can then take steps to have it removed.

Evidence of earnings

Your regular income will be a key factor in determining whether or not a lender approves your application, as it shows whether or not you can afford to make your monthly interest payments and also commit to any regular saving or investment required for your repayment strategy.

Gather as much evidence of your earnings as you can beforehand, to save time during the application process. Use our mortgage application guide to help with this.

Review your existing borrowing

Because lenders look at your whole financial picture to determine affordability, any other outstanding borrowing can impact your chances of success as it leaves you with less disposable income every month.

It’s a good idea to do an audit of your finances before putting in your application to see where you might be able to reduce these monthly commitments.

How much equity will you need?

The more equity you have in your property, the better your options for switching to an interest only mortgage, as the equity acts as your deposit. Most lenders will want to see a loan-to-value (LTV) equivalent to 70%-75%, due to the additional risk involved.

That said, having a lower percentage of equity doesn’t mean a switch is impossible, you may just need help from a specialist broker to help you identify the lenders who will look more favourably on your application.

What other options are available?

If you want to make the change purely because you’re having trouble meeting your current monthly mortgage payments, a good first step is to talk to your current lender and see if there’s a way to temporarily relieve the pressure, such as taking a mortgage repayment holiday.

If this option doesn’t give you enough breathing space then there may be other alternatives, such as:

  • Short-term switch to interest only (12-24 months)
  • Remortgaging your existing deal to a better rate or for a longer term
  • Find a lender who can offer a part interest part repayment mortgage

This last option will provide you with the best of both methods. Part interest part repayment mortgages will give you the comfort of knowing a portion of your capital will be repaid by the end of the term whilst still giving you the freedom of using your own repayment method for the remainder.

How popular are interest only mortgages nowadays?

20 years ago the appetite for interest only mortgages, both from lenders and borrowers, was high. The financial crisis of 2007-08 however left many borrowers with savings and investments worth a lot less than they needed to pay off their capital. This increased risk, alongside tighter regulations and stricter lending requirements, has led to a fall in the popularity of the product.

There are still plenty of interest-only mortgages available, but it may be useful to work alongside a specialist broker to identify the best lenders for your circumstances and so reduce the risk of your application being turned down.

Get matched with a interest only mortgage broker

Switching mortgage repayment methods mid-term can be a risky decision and is not one to be taken lightly, so the support of a specialist mortgage broker is invaluable to give you the advice and guidance you need.

Using our unique, free, broker-matching service we can match you with an advisor who has specific expertise in switching from repayment to interest only mortgages, so you can feel confident that the deal you end up with is the best one for you.

So give us a call on 0808 189 0463 or make an enquiry to start the process.

FAQs

Can I change to an interest only mortgage if I’ve recently got a new job?

When you apply for any mortgage, lenders like to see proof of regular and reliable income to show that you can afford to make the repayments. A longer work history is best, but if you have recently changed jobs then there may still be evidence that you can provide lenders to show your future income is certain. Talk to a broker if you’re not sure of how best to tackle this.

Will there be any fees to pay?

As well as any standard mortgage arrangement fees, you may incur early repayment fees, depending on your existing mortgage terms. Check this with your current lender to avoid any unexpected costs.

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We can help! We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Interest Only Mortgages Ask us a question and we'll get the best expert to help.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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