Switching From an Interest Only to a Repayment Mortgage

It’s not unusual to find borrowers with an interest-only mortgage looking for ways to transfer it to a repayment mortgage. This is because, while only paying the interest keeps your monthly payments down, it can be more costly in the long run, plus repayment vehicles can sometimes falter.

In this article, we’ll explain why switching is actively encouraged by some lenders, how to transfer your mortgage if you decide it’s right for you, and why using a mortgage broker is your best route to the most affordable deal.

Can you change your mortgage from interest-only to repayment?

Yes! Many lenders prefer repayment mortgages for residential borrowers. These mortgages reduce your balance over time, giving you and your provider added security.

Reducing your mortgage balance over the term of your loan will mean you will have paid all (or at least a fair chunk) of the original capital amount of your mortgage when your term ends. The sooner you switch, the longer your new loan will run and the easier it will be to reduce your balance.

With some repayment vehicles expected to fail as interest-only mortgages expire, switching to repayment could be the difference between staying in your home and being forced to sell your property to pay off your mortgage from the proceeds.

Fortunately, it’s a straightforward process; help is available if you get stuck.

What are the implications of switching?

The chances are your monthly repayments will go up after you switch. That said, if the value of your property has risen significantly since taking out your mortgage, your loan-to-value (LTV) could be lower, which may mean you might benefit from a better interest rate on your new deal.

Remember, with interest-only, the capital balance of your original mortgage will remain the same, so the property value is crucial.

If the value of your property has decreased, you could find it difficult to remortgage and will need to approach a specialist lender.

When considering whether to switch, think about other expiring financial commitments. For example, when your car finance is cleared, you may be able to put a few hundred pounds a month towards a repayment mortgage without increasing your total monthly outgoings.

Our mortgage calculator, which is set to repayment by default but includes the option to compare the results with interest-only figures, can help you get an idea of how your repayments will change.

By switching to a repayment mortgage, you could reduce the overall cost of borrowing and build up more equity in your property as you bring down the balance of your mortgage. This will potentially give you more options with future remortgage opportunities.

Other ways to get out of an interest-only mortgage

There are several ways to get out of an interest-only mortgage, and which is the right method for you will depend on your circumstances.

If you’re looking to remortgage to a repayment mortgage, you’re advised to do so at the end of any fixed-term rate you are on to avoid early repayment fees.

Product transfer

Doing a simple product transfer with your existing provider and negotiating a better deal may be possible. While this may seem the easiest option, it may not be the best choice. It’s worth speaking to your lender to ask what they can offer you, but comparing it with what else is available makes sense to make sure you get the best deal.

This method often suits borrowers who do not meet eligibility requirements for a new mortgage due to a change in circumstances since taking out their loan.

Remortgaging with a new lender

Suppose you can remortgage with your existing lender or a new provider. In that case, you may benefit from a better interest rate – mainly if your LTV has come down.

If affordability proves an issue, you could extend the term of your loan to make your monthly repayments more affordable. But bear in mind that this will increase the overall cost of borrowing.

Sometimes, your existing lender will not allow you to remortgage on interest-only, so you’ll need to explore other options before your fixed term ends.

Arranging an interest-only mortgage used to be a way to increase your loan amount. These days, providers usually calculate the maximum amount you can borrow on an interest-only mortgage using the same income multiples as a repayment mortgage (typically 4.5 times salary, but it is possible to borrow up to 6 times in some circumstances).

Remortgaging requires a full application, so you will need to meet the lender’s eligibility criteria. There are usually fees to pay. Our guide to mortgage applications provides information on the typical requirements.

Switch to a part-and-part mortgage

If you don’t meet the criteria to switch your entire loan to a repayment mortgage, you can at least change part of it. This can be done with your current lender or a new provider.

A part-and-part mortgage is a hybrid of repayment and interest-only. It allows you to keep your monthly repayments manageable while reducing your balance and lessening the burden come the end of your interest-only term.

You could increase the repayment element of the loan when you come to remortgage again, further reducing your balance and long-term borrowing costs.

Use our calculator below to determine what your new repayments will look like if you choose this option.

Savings and investments

If you have accrued enough savings or other investments, this could be used to pay off your mortgage. If you’re considering this option, get independent financial advice to ensure it fits your long-term plans and doesn’t tie up too much of your cash.

Downsize

Selling up and moving to a cheaper property will release the equity in your current home.

This could be used to:

• Pay off your interest-only mortgage and buy a new place outright
• Clear your current mortgage and put down a sizeable deposit that allows you to take out a repayment mortgage on your new property.

Sell another property

If you own more than one property, you may be able to sell one of them to raise the funds to pay off your interest-only mortgage.

Equity release

If you are 50 or over and have sufficient equity in your property, you may want to consider an equity release product. This could enable you to take a lump sum and pay off your existing interest-only loan with no monthly payments due until you pass away or move into long-term care.

You should always seek an independent broker to ensure impartial advice. Whilst equity release suits some homeowners, it can be a very expensive way to borrow and can significantly impact the inheritance you leave behind.

How a broker can help you switch

Every penny counts when it comes to switching, as your monthly payments are likely to increase. A whole-of-market broker will compare every deal in the UK to ensure you get the best one possible to meet your current and future financial goals.

What’s more, they will identify the best lenders according to your circumstances, so you won’t make multiple applications and harm your credit file.

Which lenders allow you to switch?

Most lenders will allow you to switch your mortgage type, provided you match their risk profile and prove the new rate is affordable. The key to making the right decision is assessing all options and calculating the short-, medium-, and long-term costs to make a fully informed decision.

The most important thing is to make sure you approach a provider that is sympathetic to your circumstances. Often, if your situation has changed since taking out your current mortgage, switching to a more suitable lender can save you thousands over the term of your loan.

Get matched with a handpicked mortgage broker according to your circumstances

Our broker matching service will pair you up with a mortgage broker who has a proven track record of helping people in your situation switch to the best mortgage deal for them.

After a brief chat to understand your financial circumstances and reasons for switching, we will select the best broker to work with you. They will then scour the market, present you with all the options available, and help you make the right decision.

Call now on 0330 818 7026 or enquire online to arrange a free, no-obligation chat