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Switching From an Interest Only to a Repayment Mortgage

Get expert advice on how to best switch from interest only to a repayment mortgage

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 19, 2021

Interest only mortgages offer some clear advantages to those looking to reduce their cash flow, but what are the options if you decide that the time has come to start paying down the capital as well as the interest? The good news is that switching to a repayment model is not only possible, but it’s a move that mortgage companies generally encourage.

Can I switch to a repayment mortgage?

Yes, this is possible, as long as your mortgage lender approves you for a repayment mortgage. Switching to a repayment mortgage from an interest-only mortgage can be a good option for many borrowers and there are plenty of lenders who allow this.

Options available to you might include…

  • Switching to a repayment mortgage with your current lender to keep the same deal and interest rate
  • Switching to a new repayment mortgage with your current lender
  • Remortgaging onto a repayment mortgage with a different mortgage lender
  • Switch to a part and part mortgage where you make repayments on a proportion of the outstanding balance, either with your current lender or a new one

The process of switching can vary from lender to lender and can differ depending on whether you’re doing a product transfer with your existing mortgage provider, or a full remortgage with a new one.

Once they made the decision to switch to a repayment model, many borrowers treat this as an opportunity to search the market for a better interest rate, and this is something a mortgage broker can help you with.

What determines whether I can switch?

Whether you can switch will be at your mortgage lender’s discretion and you’ll only be eligible to do so if you meet their criteria for a repayment mortgage. This will be assessed in the same way as your original interest-only mortgage was, with the lender taking a close look at your credit history and affordability, among other factors.

You can read about what lenders look for when assessing mortgage eligibility in our guide to mortgage applications.

Can I switch if I have bad credit?

Yes, but it could be more difficult depending on the age, severity and reason for your bad credit. You will only be unable to switch if your adverse credit prevents you from meeting the lender’s criteria for a repayment mortgage, but criteria can vary across the market.

If you want to change your mortgage from interest-only to repayment but have credit problems, there should still be some options available to you. Your best course of action is to speak to a reputable, whole of market advisor, who understands and regularly arranges deals switching interest-only mortgage to repayment mortgages, who can work with you without making multiple failed applications and further damaging your score.

Fortunately, there are a handful of lenders that are happy to consider mortgages for people who have been bankrupt. We work with advisors who can help you find the right one if you are considering switching to a repayment mortgage from an interest-only mortgage.

For more information on refinancing with credit issues, visit our specific bad credit mortgages section.

Do I need to have equity in my property?

Not necessarily. It is important to remember that, as you have not been paying off the balance of your interest-only mortgage, you will not have built up any equity through repayments on the loan.

This means that, unless your property has increased in value, you are likely to be borrowing the same loan to value (LTV) as when you first took out your mortgage.

If, however, your property has increased in value, when you switch an interest-only mortgage to repayment then you may be able to secure a mortgage at a lower LTV.

Generally speaking, if you are looking for a mortgage with a lower LTV, you will have access to more options and potentially lower rates.

Can I switch if I recently changed jobs?

Even if you have recently started a new job you could still switch from interest-only to a repayment mortgage and many lenders will consider mortgage applications from borrowers who are still in their probationary period. Some may even consider a future contract within 3 months of the start date of a new job.

On the other hand, it’s not unusual for mortgage lenders to ask for a minimum of 12 months’ employment history – so this is another area where criteria varies greatly depending on the choice of lender.

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Can I change my mortgage if I am recently self-employed?

Yes, there are lots of options for borrowers who work for themselves and it is now common for specialists to get mortgages approved based on just 1 years’ accounts.

Some mortgage lenders can even consider less trading history if you are close to your year-end or were in the same line of work as an employee before you became self-employed.

How you draw an income from your business will influence the lender that best suits your circumstances. Many lenders calculate how much you can afford to borrow based on salary and dividends for company directors and some lenders can now also consider additional remuneration, such as private health insurance, directors’ car allowance and use of home as an office.

There are also lenders that can use profit retained within the business towards an affordability calculation, so this is an area where expert advice is vital as it could make a big difference to how much money you can borrow.

Age limits

Some people are concerned about switching from interest-only to repayment because they fear they might be too old.

While some lenders have a maximum age at application or at the end of the mortgage term and won’t cater for anyone over 75, there are others who will go up to 85 and a minority that do not stipulate a maximum age.

For these lenders, the important thing to think about is affordability and they will want to know that, if the mortgage stretches into your retirement, you will continue to be able to afford the repayments based on your retirement income.

Why switch to a repayment mortgage?

There are many reasons why you might consider switching from an interest-only to a repayment mortgage, but most commonly, customers decide to do this because their circumstances have changed. Perhaps you can now afford the monthly payments on a repayment mortgage but you couldn’t before, or maybe your repayment vehicle has let you down.

You could, for example, want to increase the amount you have borrowed and cannot do so with an interest-only mortgage, or you may have had a change in circumstances, such as a higher income that enables you to meet the increased monthly payments on a repayment mortgage. Doing this will build equity in the property whereas payments on an interest-only mortgage will not.

Can you afford to switch?

It is likely that your monthly mortgage payments will increase if you change your interest-only mortgage to a repayment mortgage as you will be repaying the capital balance of the loan as well as the interest, but this may not be the case if you are also able to secure a lower rate when you switch mortgage.

Most lenders will now calculate the amount they are able to lend on an interest-only mortgage in the same way as they calculate affordability on a repayment mortgage, which effectively means that taking a mortgage on an interest-only basis does not mean you will be able to borrow any more.

For this reason, if you originally took your interest-only mortgage within the last few years and your circumstances haven’t changed, you shouldn’t have a problem in demonstrating affordability when you convert an interest-only mortgage to repayment and even if your circumstances have changed, there should be plenty of options for you, even if you have recently changed job or become self-employed.

How much can you borrow?

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.

What if I need to shorten the loan term?

One consideration if you are changing from an interest-only mortgage to repayment if you need to shorten the term of the loan. This will increase the monthly payments in order to pay off the balance.

One option to keep the repayments affordable could be to switch to a part and part mortgage on which you make repayments on a proportion of the balance and pay only the interest on the remainder.

How to switch to a repayment mortgage

Most people simply contact their lender and ask them for permission, but don’t make this rookie mistake. Lender loyalty could end up costing you a lot of money because there could be a better deal out there with another mortgage provider.

The best way to switch is through a mortgage broker who specialises in remortgages as they can compare every repayment mortgage deal on the market for you. They will narrow down the list to suitable products that you qualify for and negotiate the switch with the lender offering the best deal.

Your broker will offer you bespoke advice on your switch to make sure you’re making the right decision. They could save you money by negotiating a better interest rate on your behalf and even help you shave time off the process by assisting you with your paperwork.

Speak to an expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry and we’ll be in touch soon to discuss your plans to switch to a repayment mortgage Once we have a good understanding of your requirements, we can refer you to a suitable expert who will help you through the process, from finding the best possible deal to submitting your application.

Still got questions about switching from interest-only to a repayment mortgage? Take a look through our FAQs below to see whether we’ve covered them.

FAQs

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

Yes. Most landlords choose an interest-only mortgage to maximise their monthly profits. By paying less each month, you are theoretically pocketing more of the rental returns – but if you feel that switching to a repayment buy-to-let mortgage is the right option for you, for whatever reason, this is certainly possible and the process is no different than it would be for a residential mortgage.

There are, however, tax implications to consider. If switching means making a larger profit, this could mean having to pay extra tax, although keep in mind that your portion of the profit will likely be larger than the taxman’s.

Can I change an endowment mortgage to a repayment mortgage?

Yes, as long as you meet the criteria for a repayment mortgage with your chosen lender. See our guide to resolving an endowment mortgage shortfall to find out what other options you might have.

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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!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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 who 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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