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Changing from an interest only to a repayment mortgage

Get the right advice for switching between mortgage repayment types

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 10th October 2019 *

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. 

In this article we will cover the following topics:

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If you are thinking of switching from an interest-only mortgage to repayment, the experts we work with can help: call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry, and we’ll be in touch soon to discuss your requirements. We work with specialist advisors who will be able to guide you on the best options for your circumstances.

Can I switch to a repayment mortgage?

Yes, it may be possible.

Some lenders are happy for borrowers to change their mortgage from interest-only to repayment and you might well have plenty of options at competitive rates.

There are also options to switch from an interest-only mortgage to a part and part mortgage where you make repayments on a proportion of the outstanding balance.

Why switch to a repayment mortgage?

There are many reasons why you might consider switching from an interest-only to a repayment mortgage.

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.

Do I need to have equity in my property to switch to repayment?

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.

Hypothetical Example:

If, for example, you bought your property for £400,000 and you have an interest-only mortgage on it for £300,000 you would already have £100,000 in equity and the LTV of your mortgage will be 75%.

If your property then increases in value to £500,000, your mortgage remains at £300,000 because you haven’t paid any off, but your equity now stands at £200,000 and the LTV of the mortgage would be 60%.

Switching to a repayment mortgage from interest-only will also mean that you start to build up more equity by repaying the loan, which could enable you to lower your LTV even further when you remortgage in the future.

Affordability: Can I 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 I borrow on a repayment mortgage?

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.

Hypothetical Example:

Say your basic salary is £30,000, but you earn an annual bonus of £15,000. Here’s what different mortgage lenders might be able to offer you:

Lender 1 considers 50% of your bonus and lends up to 4x income

£15,000 x 50% = £7,500

£30,000 + £7,500 = £37,500

£37,500 x 4 = £150,000 max loan

Lender 2 considers 100% of your bonus and lends up to 5x income

£15,000 x 100% = £15,000

£30,000 + £15,000 = £45,000

£45,000 x 5 = £225,000 max loan

In this example, this difference between the amount the two lenders will lend is £75,000, not because your circumstances have changed but because of the different ways they calculate your affordability.

Can I switch from interest-only 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 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.

Can I change my mortgage from interest-only to repayment 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.

Switching from interest-only mortgage to a repayment mortgage if you are a contractor

There are also lots of options for contract workers and some lenders can consider new contractors if they have previously been employed in the same industry in which they are contracting.

Affordability on a contractor mortgage is generally based on the day rate you earn and lenders will often consider annual income to be weekly rate x 46 weeks to allow for holidays and breaks between contracts.

Hypothetical Example:

Day rate: £500

£500 x 5 days (1 week) = £2,500

£2,500 x 46 weeks = £115,000

There are also specialist options for workers who are paid through the Construction Industry Scheme (CIS) that use the gross income on a payslip rather than business accounts or self-assessment.

The impact of loans and credit cards on mortgage borrowing

If your outstanding debt has increased since you took out your interest-only mortgage, this could affect the amount you’re able to borrow on a repayment plan. 

For example, if you’ve taken on some unsecured credit, this may reduce loan the mortgage lender is happy to offer you when you switch products.

When mortgage lenders calculate affordability, they take into consideration your outgoings and credit commitments, so reducing the balance on any credit cards or loans could increase the amount you are able to raise on a remortgage. Here’s how it works:

Hypothetical Example:

Say you you earn £40,000 a year and have monthly credit card and loan commitments of £400, a mortgage lender might subtract these commitments from your income when they calculate how much they are able to lend to you.

Annual credit commitments:

£400 x 12 = £4,800

Income used by lender in affordability assessment:

£40,000 - £4,800 =  £35,200

If the lender is able to lend up to 5x income, you could borrow £132,000

£35,200 x 5 = £176,000

However, if you were able to pay off the credit cards and loans and so did not have monthly credit commitments of £400, the same lender might be able to advance £200,000.

£40,000 x 5 = £150,000

If you are thinking of switching an interest-only mortgage to repayment and want to know your options make an enquiry and we’ll introduce you to an expert advisor for free.

Are there age limits for switching from interest-only to repayment?

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.

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.

We work with specialist advisors who will be able to talk you through the best options for your circumstances, so make an enquiry to speak with one of them today.

Can I switch from interest only to repayment with bad credit?

For more information on refinancing with credit issues, visit our specific bad credit section of the site.

If you want to change your mortgage 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.

How to check your credit file

To get a full picture of what lenders can see on your file, we would suggest that you sign up for Experian, Check My File, Equifax and UK Credit Ratings.

It’s a good idea to sign up for all four before you start looking to move from an interest-only to a repayment product because the files can differ in terms of what is actually registered.

Talk to an expert about changing from an interest-only to a repayment mortgage

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.

Updated: 10th October 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of 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 info 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.