In this brief guide, we will answer the question “Can I change my interest-only mortgage to repayment?”

Can I change my interest-only mortgage to repayment?

Yes, you should be able to switch your existing mortgage from interestonly to a repayment mortgage with your current mortgage lender however the process of switching can vary from one mortgage lender to another.

If you are considering changing your interest-only mortgage to a repayment mortgage then you should first contact your mortgage lender about this. You may consider speaking to a mortgage broker first as mortgage brokers will be able to source mortgage deals from a much wider pool of mortgage lenders.

With an interest-only mortgage, you only repay the interest on the capital outstanding on the mortgage via your monthly mortgage repayments. You do not repay any of the capital borrowed on the mortgage until the end of the mortgage term or at agreed intervals during the mortgage term by using your capital repayment vehicle which will have been agreed upon by the mortgage lender at the beginning of the mortgage term.

The capital repayment vehicle could be:

An endowment policy

Your savings account

By sale of the property

By sale of another property

Using other investments

On the other hand, with a repayment mortgage, your monthly mortgage repayments will contain both capital repayments and interest repayments. This means at the end of your mortgage term you will have repaid the capital balance in full.

Why you may want to change your interest-only mortgage to repayment

There are several reasons why you may want to change your interest-only mortgage to repayment, they are:

You cannot make the capital repayment at the end of your interest-only mortgage:

If you cannot make the capital repayment due at the end of your interest-only mortgage then you should consider asking your mortgage lender to change your interest-only mortgage to a repayment mortgage term.

You may not be able to make the capital balance [ayment at the end of your mortgage term if your investments underperformed, the house you were hoping to sell is now undervalued or your cash reserves have now been depleted due to financial emergencies etc.

Endowment policies which were sold alongside so many interest-only mortgages in the 1980s and a lot of these endowment policies went on to underperform and this meant that a lot of borrowers had to change their intent-only mortgage to a repayment mortgage, where possible.

If you feel like you will be unable to repay the capital balance at the end of the mortgage then you should inform your mortgage lender as soon as possible so they can begin to work towards possible solutions.

Your mortgage lender will want to ensure that you can make the monthly mortgage repayment until the end of the new mortgage term you have requested and hence will require you to make a mortgage application after which they will undertake a mortgage affordability assessment.

To be able to get a mortgage lender to change your interest-only mortgage to a repayment mortgage you will need:

A good credit score

A stable income

Sufficient equity in your home (as mortgage lenders have a loan to value requirement)

Aside from changing your interest-only mortgage to a repayment mortgage, you can also change part of your interest-only mortgage to a repayment mortgage. This is known as a part and part mortgage where part of the mortgage is interest-only and part is capital repayment.

You can use a part and part mortgage calculator to see what your monthly mortgage repayments will be and one the capital balance you will need at the end of the mortgage term would be.

In some cases, you may simply choose to change from an interest-only mortgage to a repayment mortgage by choice if you don’t like having an interest-only mortgage for whatever reason. One of the most common reasons is due to the fact that you won’t have a huge capital balance to repay at the end of the mortgage term. The interest savings made when comparing a similar interest-only mortgage with a capital repayment mortgage may also be substantial.

Changing your interest-only mortgage to a repayment mortgage

When looking to change your interest-only mortgage to a repayment mortgage there are two main options:

Change your interest-only mortgage to a repayment mortgage with the same mortgage lender

Change your interest-only mortgage to a repayment mortgage with a different mortgage lender

Change your interest-only mortgage to a repayment mortgage with the same mortgage lender

You can change your interest-only mortgage to a repayment mortgage with the same mortgage lender by simply informing your current mortgage lender that you intend to switch your mortgage to a capital repayment mortgage. 

Your mortgage lender will analyse your current mortgage affordability situation and let you know what mortgage term they may be able to offer you, if there will be any early repayment fees, If there are any mortgage fees for your new mortgage, what mortgage rate you will be offered and what your monthly mortgage repayments will be. 

All of this information should be present in the key facts illustration the mortgage lender provides you. 

The main benefit of using your current mortgage lender to change your interest-only mortgage to a repayment mortgage is that your mortgage lender may be more understanding of your current situation. They may also be able to offer you exclusive deals to stick with them

Change your interest-only mortgage to a repayment mortgage with a different mortgage lender

Your second option is to remortgage to a new mortgage lender. As with any new mortgage, the mortgage lender will undertake a mortgage affordability assessment to see if you can afford a new capital repayment mortgage.

They will inform you of what mortgage fees the new mortgage product will have, the mortgage rate and any other important information such as the early repayment charge, your monthly mortgage repayment etc.  

You will be able to find all of this information in your key facts illustration document.

The benefits of remortgaging your interest-only mortgage to capital repayment mortgage with a new mortgage lender are that you will be able to search the whole of the market for competitive mortgage rates and other mortgage products such as part and part mortgages which your current mortgage lender may not offer.

Using a mortgage broker to change your interest-only mortgage to a repayment mortgage

You may want to consider using an independent mortgage broker to change your interest-only mortgage to a repayment mortgage.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer. Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

FAQs about changing your interest-only mortgage to repayment

What can I do when my interest-only mortgage ends?

When your interest-only mortgage ends you can do the below:

Switch to a part and part mortgage
Switch to a capital repayment mortgage
Pay off your capital balance with a remortgage
Pay off your capital balance with your savings or investments
Pay off your capital balance by selling your home

Is interest-only mortgage better than repayment?

An interest-only mortgage may offer flexibility to borrowers( especially buy to let investors) by reducing the monthly mortgage repayments on the mortgage in comparison to a capital repayment mortgage. In this regard, it may be seen as better than a repayment mortgage but there are other factors to consider.

Use a mortgage calculator

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Repayment type
First-time buyers are unlikely to be able to secure an interest only mortgage
Repayment
Interest-Only
 
Property value
£
 
Deposit amount
£
 
Mortage Term
Min 10
Max 40
 
years
 
Initial interest rate
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1.9%
2-years fixed
2.2%
3-years fixed
2.4%
5-years fixed
 
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In this brief guide, we answered the question “Can I change my interest-only mortgage to repayment?” If you have any questions or comments lease let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.