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Switching to an interest only mortgage

Mortgages are usually a household’s largest monthly expense, so it makes sense you might want to save on this wherever possible. One way you can save each month is by changing from a capital and repayment mortgage to an interest only mortgage.

Interest only repayments are generally far lower, but there are different requirements and things to think about with this mortgage type. It is best to assess both mortgages carefully before choosing to switch your existing mortgage deal.

In this guide, we aim to help you understand the difference between repayment and interest only mortgages. We will also discuss the reasons why homeowners might (or might not) be better off from switching to interest only mortgages.

In this section:

The two main types of mortgages available from lenders are repayment (also known as capital and repayment) mortgages and interest only mortgages.

Repayment mortgages are a mortgage where you repay both the capital you have borrowed and the interest on the loan each month. These will usually have higher monthly repayments compared to interest only mortgages and are the mortgage type most buyers will have.

Interest only mortgages are where you only repay the interest element of your mortgage each month (as the name suggests). The full amount borrowed will need to be repaid as a lump sum at the end of the mortgage term. These mortgages are most commonly used for buy to let properties as they allow landlords to keep their monthly expenses down.

Certain lenders can offer what is known a part interest only, part repayment or ‘part and part” mortgage. This mortgage type is not as widely available, but allows you to split your mortgage term. This means if you have a mortgage term of 25 years for example, you could have 10 years interest only, followed by 15 years repayment.

Can I switch to interest only mortgage?

Interest only mortgages are most often approved for buy to let mortgages, but this doesn’t mean you can’t switch your home mortgage to an interest only deal. As long as you can meet the lenders criteria for interest only borrowing, it is possible to switch.

Depending on the lender and mortgage you have, you could be charged fees like early repayment charges (ERCs) for doing so though. If you are unsure if your mortgage includes ERCs, you can check your mortgage documents or get in touch with your lender.

You will also need to have a solid repayment plan in place before a lender will consider approving you for an interest only mortgage. You only repay the full amount of the mortgage at the end of the term which increases risk. Lenders will want to be confident you will have the resources available to repay the full amount.

How to switch to interest only mortgage

When borrowers are interested in switching to interest only mortgages, lenders will usually have some requirements in place for this to be possible. Though each lenders criteria can vary, there are certain factors that will usually be applicable:

  • You will need to hold a significant amount of equity in your property to use in place of a deposit. Interest only mortgages will always require a higher deposit amount, due to the increased risk for the lender.
  • Often, you will need to be a high earner to qualify for an interest only mortgage. Lenders generally will have minimum acceptable annual income amounts for this mortgage type (anywhere from £75,000 upwards).
  • A detailed plan in place for how you will pay off the loan at the end of the mortgage term, referred to as a ‘repayment vehicle’.

The way your mortgage changes will depend on your lender. With most lenders, it is possible to adjust your mortgage deal and repayment type without needing to remortgage your property. In some cases, you might need to remortgage and change your lender. This could be if your lender does not offer interest only mortgages or you don’t meet their criteria for interest only lending.

Is there a way of switching to interest only mortgage temporarily?

If you need to lower your mortgage payment amount for a shorter period of time, some lenders will allow you to change to interest only payments temporarily. This can be helpful if you are struggling to make your current repayments but you think this situation will change in the future.

You could switch your deal for 12 or 24 months, allowing yourself time to recover your finances enough so you can afford capital repayments again. Not all lenders will allow this though so you may need to remortgage to make this possible.

Should I switch to an interest only mortgage?

There are pros and cons to interest only mortgages and it is wise to consider both before making any decisions. You can save significantly on your monthly outgoings with far lower monthly payments but the interest rates charged can be higher. You would also need to be sure you would be able to repay the loan in full at the end of the mortgage.

Ultimately, the decision is up to you and what best suits your own finances and circumstances. There are definite advantages to interest only mortgages, but they may not be the right choice for everyone.

If you are interested in changing your mortgage deal but unsure of your next steps, you can speak to one of our highly skilled advisors. We can support you throughout the process and advise on whether switching to interest only mortgage would be a good option for you.

Useful Resources

Financial Conduct Authority (FCA) – Mortgage Switching Research

Building Societies Association – Mortgage & housing statistics

Bank of England – Mortgage Lenders and Administrators Statistics 2022

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