Updated: March 01, 2022

Changing an Interest-Only Mortgage to Repayment

Thinking of switching from an interest only to repayment mortgage? It can be done! Find out the pros, cons and exactly how to do it in our expert guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: March 01, 2022

With a capital and repayment mortgage, your monthly payments cover the interest and pay of some of the loan itself. This method is attractive to anyone looking for a guarantee they’ve paid off the loan entirely by the end of the mortgage term.  

If you have an interest-only mortgage and are considering switching to repayment, you’re in luck. By following this guide you’ll have a clearer understanding of why this could be the right choice for you and how to make sure you’re getting the best deal. 

Can you switch from an interest-only to repayment mortgage?

The simple answer is, yes! Most mortgage lenders are open to the idea, as long as you can prove you can meet the larger monthly repayments. Paying off the capital gradually each month is a guarantee for them, as much as it is for you.

Many borrowers use this opportunity to remortgage, either with their existing lender or a new one. This is where a mortgage broker can help you consider all the options available and make the right choice.

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Why switching could be the right move

While an interest-only mortgage is great because you pay less per month, there’s always going to be an element of uncertainty with paying all of the capital borrowed in one lump sum at the end of the term. If your circumstances have changed and you can afford to make bigger repayments, your debt will be more manageable and you’ll have more equity in your property. By the end of the term everything is paid and the property’s all yours.

With a repayment mortgage, you could also end up paying less interest overall. As the amount of loan decreases during the term each monthly payment contains more of the capital element than interest.

To get an interest-only mortgage, you have to prove to a lender you can afford the lump sum required at the end. This can be paid by selling your house, or using something called a repayment vehicle.

This might be another property you’ve committed to selling, or other savings and investments. If you’re worried your repayment vehicle isn’t on track to repay the capital amount, switching to a repayment mortgage can rectify this position.

What are your options?

Your options for switching are quite simple. You can:

  • Switch to a repayment mortgage with your current lender, keeping the same deal and interest rate
  • Switch to a new repayment mortgage with a different lender
  • Switch to a part-and-part mortgage
    • This allows you to make repayments on just some of the outstanding balance, meaning lower monthly payments. You can do this with your current lender or a new one

Switching mortgages comes with some pros and cons. It does mean you can shop around for a new deal. But leaving your current mortgage early could come with some big early repayment charges. You could also switch interest rates.

The best thing to do is to get a mortgage broker involved to help you compare all the variables between deals from other lenders as well as your own.

How a mortgage broker can help you switch

Many borrowers use the switch from interest-only to repayment mortgage to shop around for a new mortgage deal. A broker will give you independent advice and will be able to advise you on the whole of the market, whereas a lender can only advise you on the mortgage products they themselves have available. . A broker will also know who the best lenders are for these types of mortgages and help you prepare your application, giving it the best chance of success.

Get in touch with us today if you need any advice about switching from an interest-only to a repayment mortgage.

How does switching work?

Your lender will have run a number of checks when you originally took out your interest-only mortgage. But if you’re switching to a new mortgage with a current lender they’ll want to make sure your circumstances haven’t changed. An entirely new lender will want to be confident that you can afford to pay back your loan.

Eligibility requirements

Because repayment mortgages require higher monthly payments, lenders have slightly different eligibility requirements compared to interest-only mortgages.

Affordability

When lenders talk about ‘affordability’, they mean how easily you can pay . If you move to a repayment mortgage, you’ll usually have to make bigger payments each month as you’ll be paying back part of the loan as well.

Your lender will go through the same process they did when they agreed to give you an interest-only mortgage in the first place. This will involve an in-depth look at your credit history and how much you can afford to pay each month.

If it looks like you’ll struggle to afford a complete repayment mortgage, there’s always the option of the part-and-part mortgage version.

Borrowing limits

A standard approach to how much you can borrow would generally be up to 4 to 4.5x your income. However, there are some lenders that can advance up to 5x and a few up to 6x income.

Different lenders will also consider additional sources of income, such as bonus, overtime or investment income, in very different ways. Some lenders will use 100% of additional income sources in their affordability calculations, but others may only take 50% or might not include them at all.

Age

While some mortgage providers have a maximum age they’ll lend to – often 75, but sometimes up to 85 – others don’t have one at all.

Lenders will pay more attention to affordability, though, and will want to make sure your retirement income will definitely cover repayments.

Equity requirements

The equity you hold in your property will serve as your deposit, so you would usually need between 5% and 10%, at the very least, to get approved for a repayment mortgage.

You don’t actually have to have built up any additional equity in your property to switch to a repayment agreement. In fact, if you’ve been making interest-only repayments and your property hasn’t increased in value, you’re unlikely to have built up more, anyway.

But if your property has increased in value – great. You might be able to borrow at a lower loan-to-value (LTV) ratio than when you took out your mortgage. Remember, your LTV ratio is the percentage of the property that you actually own (compared to the amount that you still owe the bank). The more you own, the better the deals you can access.

Get matched with an experienced repayment mortgage specialist

Switching from one repayment method to another isn’t an easy decision to make, particularly if you’re already a few years into your mortgage term. If you do think you need to switch, the smart move is to talk with an experienced mortgage broker before making a final decision.

Our unique broker-matching service is designed to match you with an advisor we work with who specialises in your specific area of need. Give us a call on 0808 189 0463 or make an enquiry and we’ll arrange for someone to call you straight away.

FAQs

Can I switch mortgage if I’ve recently changed jobs?

It depends on the lender. Some will consider people who are still in their probationary period, or even take a future contract into account within 3 months of the start date. Others will ask for a minimum of 12 months’ employment history, though.

What if I’ve recently become self-employed?

Yes, this should be fine but it’s definitely worth getting expert advice. While many lenders only require a year’s worth of accounts, this is a longer record than you’d need if you were employed. 

Some lenders will accept a shorter period though. 

The difference lies where lenders calculate how much you can afford to borrow. If you’re a company director, for example, they might look at salary and dividends, plus the extra benefits you allow yourself like health insurance and a company car. Retained profits might even be acceptable, depending on the lender.

Can I switch a buy-to-let mortgage to repayment?

Yes you can. You may have chosen a buy-to-let interest-only mortgage to maximise your monthly profits, but if you want to start getting more equity in your rental property you can switch to a repayment mortgage. If this raises your profits you might have to pay more tax.

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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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