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Change a repayment mortgage to interest only

Switching a repayment mortgage to interest only

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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: 23rd August 2019* | Published: 6th February 2019

Changing to an interest only mortgage

We are frequently contacted by people who want to know whether it is possible to change their mortgage from repayment to interest only.

This is certainly possible and there are many circumstances when switching to an interest only mortgage is a sensible option, but there are a number of considerations to think about. In this article we will talk about those considerations, which include:

  • Interest only vs. repayment mortgages
  • Am I eligible to switch to interest only?
  • Do I need equity in my property to switch?
  • Can I affordability to switch to interest only?
  • Will age be a factor?
  • Can I switch to interest only if I have credit problems
  • How do I switch to an interest only mortgage?
  • Speak to an interest only mortgages expert

Interest only vs. repayment mortgages

With a repayment mortgage your monthly payments are used to pay the interest on the mortgage and also to reduce the balance of the loan so that, if you make all of the payments, by the time you come to the end of the term, the debt would have been repaid in full.

How is an interest only mortgage different?

On an interest only mortgage, you just pay the interest that is charged each month, leaving an outstanding balance to be repaid at the end of the mortgage term.

A repayment mortgage provides the only certain way of ensuring the debt is fully repaid and, for this reason, lenders tend to favour repayment mortgages.

However, there are still plenty of options for interest only or part and part mortgages, where a portion of the loan is on a repayment basis and the remainder is interest only.

There are many reasons why you may want to change from a repayment to an interest only mortgage.

The monthly payments on an interest only mortgage will ordinarily be lower than on a repayment mortgage as none of the payment is being used to pay off the balance, so by switching to an interest only mortgage you can improve your monthly cashflow position.

This could help you to make investments that could potentially provide a better return than you would otherwise achieve, or it could help you to manage a difficult financial period.

Would I be eligible for an interest only mortgage?

The most important thing you need to demonstrate when you are switching from repayment to an interest only mortgage is that you have a plan for paying off the balance of the loan at the end of the term.

Many lenders are happy to lend on an interest only or part and part basis, but they will want to know that you have a reasonable repayment strategy in place.

Lenders have different criteria as to what they will accept as a repayment strategy. Some might look for regular repayments to be made into a savings or investment account, while others can consider other assets, such as buy-to-let investments and some lenders can even accept the sale of the property at the end of the term if you plan to downsize or move into rented accommodation.

Can I change my mortgage to interest only at any time?

Depending on your circumstances, it should be possible to change your mortgage to interest only, but if you are still in the Early Repayment Charge period on your existing mortgage, there may be fees to pay to change your product. So, take a look at the detail and how it would impact your situation.

Switching to an interest only mortgage temporarily

Some lenders can also consider a temporary switch to an interest only mortgage if you are experiencing a period of financial difficulty. We work with specialist advisors who will be able to talk through the most appropriate option for your circumstances.

If your plans involve switching to an interest only mortgage on a short term basis, get in touch and the advisors we work with will help you find the best lender for this.

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

One important factor in whether you can change your mortgage to interest only is the amount of equity that you have in your property. Whereas there are many repayment mortgages that are available up to 95% loan to value (LTV), lenders tend to be more conservative in lending on an interest only basis.

However, there are still options for moving your mortgage to interest only if you have only a small amount of equity in your property.

Some lenders also provide the option to take a loan on a part and part basis in which some of the loan balance is paid on an interest only basis up to the lender’s maximum interest only LTV and the remainder of the loan is paid on a repayment basis.

Hypothetical Example

Your property is worth £500,000 and you have a repayment mortgage for £400,000, so your current loan to value (LTV) ratio is 80%.

You would like to switch to an interest only mortgage but your lender of choice only offers interest only up to 75% LTV. However, it can provide part and part mortgages up to its maximum LTV of 95%.

You could therefore split the balance and pay interest only up to 75% LTV with the remainder on a repayment basis.

Part and part mortgage

Interest only part: £375,000 (75% LTV)
Repayment part: £25,000 (5% LTV)

If you want to change to an interest only mortgage, we work with specialist advisers who will be able to look at your individual situation and identify the best option for your circumstances.

Can I afford to switch to interest only?

Monthly payments on an interest only mortgage will generally be lower than payments on a repayment mortgage but most lenders now calculate affordability on interest only loans as if it was a repayment mortgage, so changing your mortgage to interest only is not a way of stretching how much you can borrow.

If you are thinking of changing from repayment to an interest only mortgage, how much will you be able to borrow?

Every lender has its own method of calculating how much you can afford to borrow, often using sophisticated affordability models. This means a lot of choice and so it’s important to choose the right lender for your circumstances as this can make a big difference to how much you are able to borrow.

So, how much will I be able to borrow on interest only?

Lenders base affordability on your level of income and your level of outgoings. Some providers will  will cap what they’re willing to lend you based on x4 your income, while others will stretch to x5, and a minority x6, under the right circumstances.

Different lenders also consider additional sources of income, such as bonus or overtime in different ways. Some lenders are able to consider 100% of bonus, while others may take 50% and some lenders may not consider bonus payments at all.

Hypothetical Example

Say your basic salary is £30,000, but you earn an annual bonus of £20,000. Here’s what different lenders might be able to lend to you:

Lender 1 considers 50% of your bonus and lends up to 4x income
£20,000 x 50% = £10,000
£30,000 + £10,000 = £40,000
£40,000 x 4 = £160,000 max loan

Lender 2 considers 100% of your bonus and lends up to 5x income
£20,000 x 100% = £20,000
£30,000 + £20,000 = £50,000
£50,000 x 5 = £250,000 max loan

In this example, this difference between the amount the two lenders will lend is £90,000, not because your circumstances have changed but because of the different ways they calculate your affordability.

Can I switch my mortgage to interest only if I have recently changed jobs?

Yes, this could well be possible - while some lenders ask for a minimum of 12 months’ employment history many lenders can consider applications from borrowers who are still in their probationary period and some may even consider a future contract within 3 months of the start date of a new job.

Can I change my repayment mortgage to interest only if I recently became self-employed?

Traditionally lenders have asked for 3 years’ worth of business accounts, but there are now many lenders that will make a decision based on just 1 years’ accounts and a couple of can consider less trading history than this if, for example, you are close to your year end, or if you were in the same line of work as an employee before you became self-employed.

Different lenders also have different way of assessing income. Many will use salary and dividends for company directors, but some can also consider profit that it retained within the business and this could make a significant difference to the outcome

Hypothetical Example

Say you are a director of a Ltd company and a 50% shareholder of the business. The company makes £200,000 profit but you only draw a £10,000 salary plus £40,000 dividends to reduce your tax liability.

A lender that considers your income to be salary plus dividend and lends up to 5x income might be able to lend £250,000.

However, a specialist lender that is able to take into account profit that is retained in the business, would base its calculation on the 50% shareholding of the £200,000 profit. Even if this lender applies a standard 4x income calculation, the lender would be able to advance up to £400,000.

Can I change my mortgage from payment to interest only if I am a contractor?

Yes, this may be as option as , lenders have really improved the way they deal with mortgage applications from contractors and, depending on your circumstances, there could be an option for you.

Different lenders have different requirements – some may ask for a minimum period working as a contractor, whereas others can consider new contractors if they have previously been employed in the same industry in which they are contracting.

Lending to contractors is generally based on the day rate you earn, and a typical calculation might look like this:

Day rate = £600
£600 x 5 days (1 week) = £3,000
£3,000 x 46 weeks = £138,000

Lenders do not usually multiply your weekly rate by 52, to allow a number of weeks for holidays and time between contracts.

Is switching to an interest only mortgage while on maternity leave possible?

Some lenders may allow this, as long as you can prove you will have the means to keep up with the monthly interest payments while on maternity leave, and have a viable repayment vehicle in place to settle the loan at the end of the mortgage term.

Maternity can impact your affordability, so some lenders may want to see evidence that you will be returning to work after a set period and will be receiving enough capital while off work to cover the monthly payments.

Specialist lenders are often required for borrowers who are on maternity leave, or planning to go on maternity in the future, so get in touch and the advisors we work with will help you find the right one for you.

Can I switch to an interest only mortgage if I have credit problems?

A common question we receive is “can I switch to an interest only mortgage if I have credit problems?”

And the answer is often yes - switching to an interest only mortgage is possible, depending what type of credit problems you have had and how recently you have had them. While some providers (high street ones, in particular) might turn you away outright, specialist bad credit providers have the flexibility to take a broader view of your mortgage application.

How do specialist lenders assess customers with bad credit?

In general, bad credit lenders will want to know what the issue is, how long ago it was, how much it was for and whether it has been repaid. Some lenders will also ask for an explanation about previous credit problems to help them to understand whether these were one-off events or are likely to happen again.

For more info on this we cover each credit issue and getting a mortgage approved extensively within our bad credit section of the site.

How do I change my mortgage to interest only?

If you are thinking of switching mortgage to interest only call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here. We work with specialist advisors who will be able to guide you on the best options, and they will introduce you to the right lender for you needs and circumstances.

Speak to an expert in interest only mortgages

Still wondering “can I change from a repayment to an interest only mortgage?” Call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t change a fee and there’s no obligation or marks on your credit rating.

Updated: 23rd August 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.