How To Switch To an Interest Only Mortgage

There are many reasons why switching from a capital repayment mortgage to interest-only could be the right move for you, but is this possible, and if so, how?

In this article, we explore the possibilities of switching to an interest-only mortgage, what to consider if you plan to do so, and how to secure the best rates.

Can you change your mortgage to interest-only?

Yes, switching your mortgage to interest-only is possible, subject to the lender’s criteria, such as financial stability and a solid repayment plan for the loan’s principal. This reduces monthly payments but doesn’t cut the loan’s total amount, impacting long-term financial planning.

Some of the criteria for an interest-only mortgage include:

• A solid repayment vehicle (method to repay the balance) is essential. More information about potentially acceptable strategies can be found in our interest-only mortgage repayment vehicles guide. Bear in mind that not all lenders will accept all types.
• The LTV (loan to value) lending rate on interest-only mortgages tends to be lower than on repayment mortgages, so you’ll need to have enough equity in your property to meet the lender’s minimum equity requirement.
• Many lenders have higher minimum income requirements (typically £75,000 – £100,000) for interest-only mortgages, so you’ll likely have to meet this for them to allow the switch. There are, however, some lenders that have no minimum income requirement.

Will you need to remortgage?

Not necessarily. It depends on your existing mortgage provider. Lenders don’t consider changing the repayment type to refinancing, so it’s perfectly possible that you could stay on your current deal and simply change to interest-only repayments. Your terms and conditions should highlight whether this is possible, or you could speak to your lender directly.

Why you might need to remortgage

There are a couple of scenarios whereby you would have no option other than to remortgage to switch to an interest-only mortgage:

• Unavailable – If your current lender does not provide interest-only mortgages or does not allow customers to switch repayment types.
• Ineligibility – If you cannot meet your current lender’s interest-free mortgage criteria, it may be possible to remortgage to an alternative lender with criteria that match your circumstances. A broker with expertise in this area can help you find one.

You might also consider remortgaging to another lender if they offer a more flexible interest-only deal than your existing lender can provide, such as one that allows regular penalty-free overpayments. This could be advantageous to those with fluctuating incomes or who receive bonuses, as you can use them to reduce the capital you owe.

Can you switch to interest-only temporarily?

Some lenders will allow temporary switches to interest-only repayments, which can be beneficial in periods of financial difficulty. Short-term repayment changes from 1 to 2 years are typical, although this will vary from lender to lender.

If you find that you need to remortgage to switch to an interest-only deal, however, you can still remortgage back onto a repayment deal at a later stage.

How your repayments will change

When changing from a capital repayment mortgage, you can use our mortgage calculator to see how much you would save on your monthly payments.

The calculator is set to repayment by default, but once you’ve entered your figures, you can change the tool to interest only to see how the results compare.

It’s important to remember that whilst you’ll make savings in the short term on your monthly payments, the interest repaid over the full term of an interest-only mortgage is greater than the amount payable on an equivalent capital repayment mortgage, meaning you will pay back more overall.

How a broker can help you switch

Interest-only mortgages are more complex because you need to have an acceptable repayment vehicle in place. An interest-only mortgage expert like the ones we work with will be able to help you thoroughly explore all the options available to you and ensure you’re making the right choice for your circumstances.

As many lenders only provide interest-only deals via intermediaries, brokers often have access to deals that you wouldn’t be able to find on your own. This means that if you cannot meet the income or equity requirements of your current lender, they may be able to match you with a more suitable lender for your circumstances.

Even if your existing lender can accommodate your request to switch to interest-only repayments, they may not have the most competitive rates or flexible terms. In contrast, a specialist broker can help ensure you get the best deal.

Which lenders allow you to change to interest-only?

Most lenders allow you to change your repayment type, but some won’t. For example, Nationwide, one of the largest mortgage providers in the UK, will not allow a change from repayment to interest-only. However, they do allow customers to switch from interest-only to repayment.

Those lenders that are able to accommodate a switch often charge a small administrative fee and will carry out checks to ensure that you can meet the relevant criteria.

Here are some of the larger lenders that allow this change and their associated fees and criteria:

• Santander – Fee of £75 payable. Maximum LTV of 50%

• Halifax – Evidence of repayment plan required
• Lloyds – Maximum LTV 75%, evidence of repayment plan required, you are required to speak with a mortgage adviser

Things to consider before switching

The major benefit of switching to an interest-only mortgage, of course, is that this will reduce the amount of your monthly payments compared to a capital repayment mortgage. However, there are a few important factors to consider if you plan to make this type of change:

• You’ll no longer be reducing the capital on your loan if you switch to interest-only and make no optional capital repayments, which means that whatever your current remaining balance is will still be outstanding at the end of the mortgage term.
• Switching your repayment type may involve fees, and this is far more likely if you have to remortgage to a new lender to do so, especially if there are early repayment charges in your current terms.

Alternatives to switching

Most people looking to switch to interest-only repayments will be doing so to save money on their immediate monthly outgoings. If you’re struggling to afford your capital repayment mortgage, there are a number of other options available to those who don’t qualify for a switch to interest-only.

Take a mortgage holiday.

If you have a flexible mortgage, the option to take a payment holiday is often built-in. This is sometimes referred to as a deferral or payment freeze and is typically allowed for a set period of around 3 months. In this case, however, the unpaid months will be added to the mortgage balance, meaning your payments will likely be slightly higher when you resume paying.

Some lenders will allow short payment holidays regardless of your deal terms, which was fairly common at the beginning of the pandemic in 2020. It may also be possible to reduce your payments rather than stop them entirely, but again, most lenders will only agree to this for a relatively short term.

Extend your current mortgage term.

If you don’t increase your borrowing, extending the term of your mortgage will reduce your monthly repayments, as the remaining balance is spread out over a longer duration. Depending on your age and any maximum term limits that apply, your lender may be willing to make this change for you, although whether it’s possible will be at their discretion.

Remortgage for a longer term or better rate

If your existing lender is unwilling to extend the term of your mortgage, you may be able to remortgage to another lender that will. You could also remortgage for lower interest rates, either with your existing lender or a new one, which will reduce your monthly repayments even if you cannot extend the term.

Part and Part mortgages

Suppose you cannot meet the criteria for an interest-only switch. In that case, some lenders offer a part-and-part repayment basis, a combination of interest-only and capital repayment. The LTV may be slightly higher in this case, meaning the equity requirement is easier to meet. However, you will still need to provide the lender with proof of a solid repayment strategy, albeit for a lower overall figure.

Use our calculator below to work out what your new repayments could be if you choose this option.

Get matched with an interest-only mortgage expert

If you’re considering a switch to an interest-only mortgage, a broker with expertise in this niche will be best placed to help you find the right lender, even if that’s the one you’re currently with. If you’re unable to meet interest-only mortgage criteria for whatever reason, they’ll be able to help you explore other ways to save money on your monthly mortgage payments.

Our broker matching service will introduce you to a broker with the right knowledge and experience to find the solution you’re looking for. Simply call us on 0330 818 7026 or make an enquiry via this form to get the ball rolling on your free, no-obligation chat.