Last reviewed on 22nd April 2022
There are a number of reasons that can warrant a switch from an interest-only mortgage to a repayment model. Changing mortgage types is common, but you’d need to follow the correct procedure when doing so.
An interest-only mortgage will only allow you to pay the interest on your loan each month. On the other hand, a repayment mortgage allows you to repay your mortgage in full. This alone can be a reason for changing mortgage types.
A repayment mortgage will allow you to own your property outright at the end of your mortgage term. In comparison, an interest-only mortgage won’t allow for this, as the mortgage balance itself is never reduced.
Changing mortgage types usually depends on:
- The remaining term of your mortgage
- Reasons for switching mortgage types
- Whether a repayment mortgage is affordable
- Early repayment charges
- Consent from your existing lender
Our advisors can also help you when you’re ready to switch to a repayment mortgage.
Can I switch to a repayment mortgage?
Changing to a repayment mortgage can be quite simple, but it does depend on your reasons for doing so. For instance, a landlord changing investment strategies will require a different approach from a homeowner who simply wants a repayment mortgage.
Some lenders may allow you to keep your existing mortgage rate and will simply change your repayment type. Nonetheless, you’d need to make sure that doing so is viable. With hundreds of lenders available, there’s a strong chance of a better deal elsewhere. As a result, it can make sense to remortgage, while changing your repayment type in the process.
Getting a repayment mortgage on your own home
If you have an interest-only residential mortgage, you may benefit from changing to a repayment mortgage. The main reason for doing so is that you’d own your home outright at the end of your mortgage term.
It’s quite uncommon to have an interest-only mortgage on the home that you live in. Furthermore, many lenders don’t offer interest-only mortgages for residential purposes as they once did.
If you have an interest-only mortgage on the home you live in, switching to a repayment mortgage will likely increase the amount you’ll pay each month. That being said, a repayment mortgage will give you more security as you’ll start paying towards owning your home.
It’s also possible to benefit from competitive mortgage rates, as you’ll essentially be taking on a new mortgage. Although your existing lender may allow you to switch mortgage types, shop around to get the best deal.
It’s unlikely your lender will offer you the most competitive rates, especially when compared to hundreds of other lenders. Before you commit to anything, our advisors can compare the best deals for you. As mentioned, your mortgage payments are likely to increase, so every penny counts!
Moving into an investment property
If you’re a landlord, you may have a buy to let mortgage on an interest-only basis. Circumstances can change and if you now live in your investment property, you’ll perhaps want a repayment mortgage instead.
The majority of lenders understand that situations in life can change. Nonetheless, if you want to change lenders, you may be liable for early repayment charges. Even if you want to stay with your existing lender, it can still make financial sense to switch.
Moving into an investment property also means losing your rental income from that particular investment. Lenders will want to make sure that changing your interest-only mortgage to a repayment mortgage is affordable. As a result, you’d undergo affordability checks when changing mortgages.
You’ll have to calculate what works best when switching mortgage types. Our advisors can also help you with this, as it’s what we do on a regular basis. We’ll check which mortgages are affordable before applying.
Changing your investment strategy
If you’re a landlord, it’s likely you’d have an interest-only mortgage on your buy to let. Many landlords also share this same strategy as it allows you to keep your monthly mortgage payments low. In doing so, you’re able to retain more rental income each month.
So, why would you want to switch to a repayment mortgage? Well, some landlords choose to have their investment properties on repayment mortgages rather than interest only. Although you won’t generate as much profit from your rental income, you’ll own your investment property outright once your mortgage term comes to an end.
This income can be useful in your later years and in retirement. Furthermore, you may be able to benefit from any capital gains made over the years. You also won’t need a repayment vehicle or need to sell the property once your interest-only mortgage ends.
You may have also lost faith in your repayment vehicle or you simply think your property won’t sell for a profit at the end of your term. Both are valid reasons for wanting to change to a repayment mortgage.
As a landlord, it shouldn’t be difficult to switch your mortgage type. That being said, it’s important to make sure you’re on the best possible mortgage going forward. You won’t be generating as much rental profit, so keeping an eye on the numbers is crucial.
Will my mortgage lender allow me to switch?
Your existing lender will decide whether you’re able to switch mortgages. You’ll also need to meet the criteria of your new lender if you’re switching lenders.
Changing mortgage types can be difficult if:
- You’ve recently had credit issues
- You’re unsure about how much equity you have
- Your income has decreased
I’ve recently had credit issues
If you’ve recently had credit issues, switching to a new deal could be difficult. This is especially true if your credit issues are because of paying your mortgage late. In contrast, if your credit issues happened a while ago and are considered less severe, switching mortgages should still be possible.
Lenders will always carry out credit checks as part of their assessment. That being said, not all credit problems are viewed the same. For instance, being discharged from bankruptcy will make switching mortgages more difficult when compared to having a small CCJ.
If you’re not confident that your credit score is good enough, you can speak to our advisors who will guide you further. We can then let you know whether a mortgage switch is possible.
How much equity do I need?
If you have an interest-only mortgage, your mortgage balance will be the same as when you first took your mortgage. If your property has increased in value, you’ll have more equity to take a mortgage with a lower LTV. The advantage of this is that you may be able to unlock better mortgage rates by doing so.
In comparison, if your property has fallen in value, you could be in negative equity. While it’s still possible to switch mortgage types, you’ll still need to have some sort of equity in the property, such as the original deposit amount. The more equity you have, the better, especially when changing to a repayment mortgage.
Will I have enough income to switch?
Changing mortgage types will require a mortgage assessment. Lenders will check that your income is sufficient for the mortgage you’re applying for. This is because an interest-only mortgage is typically cheaper each month when compared to a repayment model.
As you’ll have an increase in monthly costs, mortgage lenders need to be sure that the loan is affordable. You can calculate your monthly mortgage cost here.
Should I change to a repayment mortgage?
Each borrower has different circumstances, so changing to a repayment mortgage will suit some but it won’t be viable for others. What you’ll need to assess is your mortgage costs now and what they’ll be with a new deal. That being said, the cost of your mortgage is only part of what you’ll need to consider before making a decision.
Although a repayment mortgage will cost you more each month, you’re also paying towards owning an asset in the future. You’ll also eventually pay less each month, as your interest will decrease in line with your outstanding mortgage balance.
You may also want to transfer just part of your mortgage to a repayment plan and keep the rest on an interest-only basis. This is also known as a part and part mortgage.
Read more: What is a part and part mortgage?
How can I get the best repayment mortgage rate?
Speak to your lender about whether they’d be prepared to change your existing mortgage to a repayment mortgage. If they are, make a note of the fees and costs involved. Once done, check what other lenders are offering you.
Many borrowers simply look at the interest rates involved, but in reality, there’s a lot more to assess to make sure you’re not overpaying on your mortgage.
As mentioned, there are other options such as keeping part of your mortgage on an interest-only basis. In all honesty, there is a multitude of options available in terms of the types of mortgages that lenders offer. You can call us on 0800 195 0490 or make an enquiry below.