Is it possible to switch to an interest-only mortgage?

mortgage advisor consulting an interest-only mortgage switch

Interest-only mortgages are attractive to many borrowers as their monthly payments can be significantly reduced, freeing up cash to improve their quality of life or to invest elsewhere. This is as opposed to repayment mortgages, where the mortgage payments consist of both capital and interest. I’m often asked by clients on a repayment mortgage, “Is it possible to switch to an interest-only mortgage?”

It is possible to switch your mortgage to an interest-only basis if you have sufficient equity in your property, an acceptable repayment plan and meet the lender’s income requirements. Many borrowers move to interest only temporarily and revert back to a repayment basis.

Understanding the implications of switching to an interest-only mortgage is crucial to ensure financial stability and alignment with one’s long-term financial goals. This article explores the possibilities, advantages, and disadvantages of moving to an interest-only mortgage. Get in touch with our mortgage brokers today for further advice.

What is an interest-only mortgage?

An interest-only mortgage is one where you are only required by the lender to pay the monthly interest cost on the mortgage rather than also reduce the capital. The loan is settled in full at the end of the mortgage term, typically using the proceeds of the sale of the property.

With a repayment mortgage, the monthly mortgage payments consist of capital (i.e. the loan itself) and interest. That means that ownership transfers to the borrower as soon as the loan is paid off.

Are interest-only mortgages hard to get?

As a general rule, interest-only mortgages are harder to get. There are more barriers as lenders see them as higher risk, whose main concern is that they will not be repaid in full at the end of the mortgage term.

Why would you switch to an interest-only mortgage?

It’s generally advised not to switch to an interest-only deal from a repayment mortgage. However, some homeowners have compelling reasons for switching, and their circumstances allow them to do so without as much risk.

Interest rate rises: In times of rising interest rates, it may be necessary for a borrower to switch to an interest-only mortgage temporarily. This is because of the lower monthly repayments during the mortgage term with an interest-only deal as opposed to a capital repayment one.

Change of circumstances: For example, if your income stream changes to a lower salary and you start to receive bonuses or commission. This may allow you to start paying lump sums off of the mortgage without having to make regular capital and interest repayments.

Advantages of an interest-only mortgage

The main potential advantage of an interest-only mortgage is that the monthly repayments are lower when compared to the payments made on a capital repayment mortgage. This is because only the interest is payable.

For example, let’s look at a £200,000 mortgage taken over 25 years with an interest rate of 5%. On an interest-only mortgage, the monthly payments would be £834. On a repayment mortgage, the monthly repayments would be £1,170.

Another advantage is that mortgage lenders will offer some flexibility as far as the repayment strategy is concerned. So you can use various other assets, such as savings, investments or other property, to eventually repay the mortgage balance.

Disadvantages of an interest-only mortgage

There are a number of disadvantages to an interest-only mortgage:

  1. The main disadvantage of an interest-only mortgage is that you are not actually reducing the actual loan. At some future date, the lender will want you to fully repay the whole loan amount. If you do not do this by the end of the mortgage term, the lender could theoretically take possession of the property to repay the mortgage debt.
  2. On an interest-only mortgage, you will pay far more interest. Again, let’s use the example of a £200,000 mortgage taken over 25 years with an interest rate of 5%.On an interest-only mortgage, the total interest bill would be £250,182On a repayment mortgage, the total interest bill would be £150,882
  3. If you make a temporary switch to an interest-only deal, the longer you leave it to move back to a repayment mortgage, the shorter the potential term and the higher your monthly repayments will be.
  4. If you are not reducing the capital on the mortgage and house prices fall, you could find yourself in a position of being in negative equity.
  5. A temporary switch to interest-only repayments may become permanent. For example, a borrower may free up monthly expenditure, but rather than save money, divert it to meet other or new monthly outgoings.

How can you switch to an interest-only mortgage?

As you can see, the disadvantages far outweigh the benefits. But if your circumstances allow, there are two main ways of switching to an interest-only mortgage.

You could apply to your current lender and request to switch your current deal to interest only. Many lenders will consider a switch to interest only, especially if this will assist borrowers facing difficulty with their immediate monthly outgoings. In this case, your lender may recommend other solutions, such as a mortgage holiday.

Alternatively, you could remortgage to a new lender. This will generally be approved during the application process as long as the borrower has evidence of a solid repayment strategy.

When is the best time to switch to an interest-only mortgage?

The best time to alter the mortgage interest structure on your mortgage depends on your own individual circumstances. For example, if high inflation and increasing interest rates make your monthly mortgage payments unaffordable.

Repayment plans on interest-only mortgages

When considering switching to interest-only monthly mortgage repayments, most lenders will want evidence of a solid repayment plan.

A clear repayment strategy could be one of the following:

  • Sale of property or second property
  • A lump sum from pension or bonuses
  • Investment proceeds from an ISA

Consult a professional mortgage adviser first

If you are considering the switch, you should take professional advice from a mortgage broker. They can advise you of the consequences of changing the repayment type and help you find the right lender with the most competitive interest rate. Depending on your circumstances and credit history, the best option may be a specialist lender.

In addition, they can suggest other options to lower your mortgage outgoings, for example, extending the term of your mortgage or taking a payment holiday. Mortgage holidays can last up to six months, but they require careful consideration as they could have a negative impact on your credit history.

Speak to a mortgage advisor at Goldmanread today

Its important that you get professional advice before changing the structure of your mortgage. At Goldmanread, we can talk you through your options and help you to make the right decision before you decide how you will proceed.

Contact us to arrange a consultation today.

Frequently asked questions about switching to an interest-only mortgage

Will switching to an interest-only mortgage affect my credit score?

Opting for an interest-only repayment plan in itself won’t affect your credit history, but applying to a new lender will lower your credit score due to the lender’s credit inquiry into your credit report.

Who should I speak to about switching to an interest-only mortgage?

It is important that you take professional advice from a mortgage broker before committing to change the repayment structure on your mortgage. A specialist broker like Goldmanread can help you find a mortgage lender who offers a competitive mortgage deal, whether that be a variable or fixed-interest mortgage.

Clive Read
Clive Read

Clive Read is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of Personal Touch Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority.

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