Switching to an Interest Only Mortgage

There are many reasons why making the switch 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?

It’s certainly a possibility with the majority of mortgage lenders, providing you’re able to meet their criteria for an interest-only mortgage, which will include:

• A solid repayment vehicle (method to repay the balance) is essential. More information about potentially acceptable strategies can be found in our guide to interest-only mortgage repayment vehicles. Bear in mind that not all lenders will accept all types.
• The LTV (loan to value) rate of lending 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 be 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 not, 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 in order 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’re unable to meet your current lender’s interest-free mortgage criteria, it may be possible to remortgage to an alternative lender with criteria that matches your circumstances. A broker with expertise in this area will be able to help you find one.

You might also consider remortgaging to another lender if they have a more flexible interest-only deal than your existing lender can provide, for example, one that allows regular penalty-free overpayments. This could be advantageous to those with fluctuating income, or in receipt of 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 do need to remortgage in order to switch to an interest-only deal, however, you would still be able to remortgage back onto a repayment deal again at a later stage.

How your repayments will change

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

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

It’s important to bear in mind 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 fully 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’re unable to 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 is able to accommodate your request to switch to interest-only repayments, they may not have the most competitive rates or flexible terms, whereas a specialist broker can help ensure you’re getting the best deal available to you.

Which lenders allow you to change to interest-only?

The majority of lenders allow you to change your repayment type, but there are some that won’t. For example, Nationwide, one of the largest mortgage providers in the UK, will not allow a change from repayment to interest-only, although 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 for doing so and will carry out checks to ensure that you’re able to 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 when 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.
• There may be fees involved with switching your repayment type, and this is far more likely if you have to remortgage to a new lender in order to do so, especially if there are early repayment charges in your current terms.

Alternatives to switching

The majority of people looking to switch to interest-only repayments will be doing so with the goal of saving 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 are likely to be slightly higher when you resume paying.

Some lenders will allow short payment holidays regardless of your deal terms, and this 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 down to 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 also extend the term.

Part and Part mortgages

If you’re unable to meet the criteria for an interest-only switch, some lenders offer a part-and-part repayment basis, which is a combination of an interest-only and capital repayment. The LTV may be slightly higher in this case, meaning the equity requirement is easier to meet, but 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.