Published 22nd August 2020 · Updated 27th November 2023 by Martin Alexander
Several reasons can warrant switching from interest-only to a repayment mortgage. Changing mortgage types is common, but you must follow the correct procedure.
An interest-only mortgage only allows you to pay the interest on your loan each month. On the other hand, a repayment mortgage will enable 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. You won’t own your property with an interest-only mortgage, as you’re not paying towards the mortgage balance.
Changing mortgage types usually depends on the following:
- 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 when you’re ready to switch to a repayment mortgage.
Can I switch to a repayment mortgage?
Changing to a repayment mortgage can be pretty simple, but it depends on your reasons for doing so. For instance, a landlord changing investment strategies will require a different approach from a homeowner who wants a repayment mortgage.
Your current lender may allow you to keep your existing mortgage rate and will simply change your repayment type.
However, changing your repayment type by remortgaging can give you a better rate, as there’s a strong chance of a better deal elsewhere. As a result, it can make sense to explore what other lenders are prepared to offer you.
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.
Switching to a repayment mortgage will likely increase the amount you’ll pay each month, but it will give you security as you’ll pay towards owning your home.
It’s uncommon to have an interest-only mortgage on your home, and many lenders no longer offer them. The good news is that almost every lender offers repayment mortgages.
Your current lender will unlikely offer you the most competitive rates, especially 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.
Moving into an investment property also means losing your rental income. Lenders will carry out affordability checks to ensure that changing your interest-only mortgage to a repayment mortgage is affordable.
You may be liable for early repayment charges if you want to change lenders during your fixed-rate period.
When switching mortgage types, you’ll have to calculate what works best. Our advisors can also help you by checking which mortgages are affordable before applying.
Read more about interest-only buy to let mortgages here.
Changing your investment strategy
If you’re a landlord, you’ll likely have an interest-only mortgage on your buy-to-let. Many landlords also share this strategy, which allows you to keep your monthly mortgage payments low and 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 ends.
This income can be helpful in your later years and retirement. Furthermore, you may benefit from any capital gains made over the years. Once your interest-only mortgage ends, you won’t need a repayment vehicle or sell the property.
You may have also lost faith in your repayment vehicle or 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, switching your mortgage type should be easy. That said, ensuring you switch to the best possible mortgage is crucial. Otherwise, you won’t be generating as much rental profit, so keeping an eye on the numbers is crucial.
Switch to a part repayment, part interest mortgage
You can transfer part of your mortgage to a repayment plan and keep the rest on an interest-only basis. To do this, you’ll need a part and part mortgage.
Read more: What is a part and part mortgage?
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
Switching to a new deal could be difficult if you’ve recently had credit issues, especially if you’ve paid your mortgage late. In contrast, switching mortgages is possible if your credit issues happened over a year ago and are considered less severe.
Lenders always carry out credit checks as part of their assessment, as not all credit problems are the same. For instance, being discharged from bankruptcy will make switching mortgages more difficult than having a small CCJ.
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 it out. If your property has increased in value, you’ll have more equity for a mortgage with a lower LTV, unlocking better mortgage rates.
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 some 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 an income 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, lenders will check whether a repayment mortgage is affordable.
Should I change to a repayment mortgage?
Each borrower has different circumstances, so changing to a repayment mortgage won’t suit everyone. You’ll need to assess your mortgage costs before and after switching to a new deal. That 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 toward owning an asset in the future. You’ll eventually pay less, as your interest will decrease in line with your outstanding mortgage balance.
How can I switch to a repayment mortgage?
Ask your lender if they’ll let you change your existing mortgage to a repayment mortgage. If they do, note the fees and costs involved. Once you’ve done this, check what other lenders are offering you.
Although interest rates will affect how much you pay, check the overall cost of the mortgage, such as the fees of each deal. Mortgages with the lowest rates often have the highest fees and can be more expensive overall.
There are other options, such as keeping part of your mortgage on an interest-only basis. An advisor can check your options and the lenders you’re eligible for.
About the author
Martin Alexander
Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.