In this brief blog, we will cover if you can change your mortgage to an interest-only mortgage and any challenges you may face when trying to change your residential mortgage to an interest-only mortgage.
Can I change my mortgage to interest-only?
Yes, you may be able to change your mortgage to interest-only but this will depend heavily on your personal circumstances and if you meet the mortgage affordabiltity requirements to change to an interest-only mortgage. You should also consider that you may have to pay an early repayment fee to leave your current mortgage product.
interest-only mortgages are much harder to qualify for than standard repayment mortgages as interest-only mortgages only require you to pay back the interest element of the mortgage throughout the mortgage term and then repay the mortgage balance at the end of the mortgage term in one lump sum.
This means if you took out a £500,000 mortgage for 25 years you will only pay the annual interest charges on the interest-only mortgage for 25 years and will then have to repay £500,000 at the end of the mortgage term in one lump sum.
Interest-only mortgages will, therefore, have lower monthly mortgage repayments and for this reason, they are sought after by many. By reducing the amount you spend per month on a mortgage you may be able to utilize this capital elsewhere and make returns which could be the oppurtunity cost of not changing your mortgage to an interest-only mortgage.
For you to qualify for an interest-only mortgage you will need to have a repayment vehicle that you will use to repay the balance at the end of the mortgage. The mortgage lender will need to approve of your interest-only repayment vehicle before they give you an interest-only mortgage.
The mortgage lender will also conduct periodic reviews of your interest-only mortgage repayment vehicle and if they find that the repayment vehicle is unlikely to repay the mortgage they may request you to switch back to a capital repayment mortgage where your monthly mortgage repayments will include both the capital and interest elements of the mortgage.
In contrast, capital repayment mortgages do not require a repayment vehicle attached to the mortgage because the monthly mortgage payments include both the interest element of the mortgage and the capital repayment element of the mortgage. This means at the end of the mortgage term you would have paid the total balance borrowed from the mortgage lender.
This means that your monthly mortgage repayments will likely increase.
If you want to change your mortgage to an interest-only mortgage the mortgage lender will have to go through similar checks with you to ensure you have a suitable capital repayment vehicle to use when the interest-only mortgage you change to comes to an end.
Alternatives from changing your mortgage to an interest-only mortgage
Below we will cover some alternatives to changing your mortgage to an interest-only mortgage. Not all of these alternatives may be useful to you and you may want to see independent financial advice from a mortgage broker
Part and part mortgages.
Changing your mortgage to an interest-only mortgage may not be your only option. You could potentially switch to a part and part mortgage which is where the mortgage is part capital repayment and part interest-only. This means that you will still need to have a capital repayment vehicle for the interest-only portion of the mortgage but because you also have a capital repayment portion and are repaying part of the capital the balance left at the end of the mortgage will be much lower in contrast to if you simply changed your mortgage to an interest-only mortgage.
The monthly mortgage repayments on a part and part mortgage may also be lower than the mortgage payments on your capital repayment mortgage which means that you may be able to benefit from changing your mortgage to a part and part mortgage in a similar way you will be able to benefit from changing your mortgage to an interest-only mortgage but without the risk of paying a huge balance at the end of the mortgage term.
Get a mortgage repayment holiday
If the monthly mortgage repayments are too much for you to handle or you are going through a financially difficult time then you may be able to ask the mortgage lender for a mortgage repayment holiday where you don’t make any monthly mortgage repayments for a fixed period. Some mortgage lenders may allow you to have a mortgage repayment holiday for up to 12 months. This will give you time to get your finances in order and begin making your monthly mortgage repayments again.
A mortgage repayment holiday is a good option but you should be mindful that although you have stopped making your monthly mortgage repayments, interest is still being charged on the balance owed and the interest being charged at those intervals are being charged on a large balance than would have been present had you continued to make your monthly mortgage repayments. This means that a mortgage repayment holiday will cost you more in interest.
At the end of your mortgage repayment holiday, you will also likely have to make higher monthly mortgage repayments for a fixed period in order to bring your account up to date.
You should consider these points when comparing changing your mortgage to interest-only or seeking a mortgage repayment holiday as an alternative.
Support for mortgage interest
If you are struggling to pay your mortgage and considering changing your mortgage to an interest-only mortgage then the support for mortgage interest scheme offered by the UK government may also be worth considering.
If you are on benefits then you may be able to use the support for mortgage interest scheme which helps you pay the interest element of your mortgage.
The support for mortgage interest scheme pays directly to your mortgage lender and must be repaid when you sell the house or die.
Remortgage to a cheaper rate
If you are considering changing your mortgage to an interest-only mortgage then you may want to also consider remortgaging to a cheaper rate as a suitable alternative. This may be especially true if the core reason why you want to change your mortgage to an -only ortgage is to reduce your monthly mortgage repayments.
Remortgaging to a cheaper rate will mean your new mortgage will cost you less per month if you keep the same mortgage term and don’t increase your borrowing by taking a further advance etc.
When considering this option you may also want to take into account any early repayment charges which may be due on your current mortgage and the costs of getting a new mortgage.
Will I be eligible for an interest-only mortgage?
When considering if to change your mortgage to an interest-only mortgage the first thing you should consider is if you will be eligible.
Your eligibility for an interest-only mortgage may weigh heavily on these 3 things
- Your capital repayment vehicle
- Your ability to repay the monthly mortgage repayments
- Your credit score and history.
Most mortgage lenders will prioritize your ability to present them with a suitable capital repayment vehicle as the key factor when determining if to change your mortgage to an interest-only mortgage. Mortgage lenders will have varying requirements for the capital repayment vehicle and you may find some mortgage lenders who will require funds to be regularly paid into a savings account where they can monitor, some may require assets and some may even allow you to use the sale proceeds from the mortgaged property to repay the interest-only mortgage.
Your ability to continue making the monthly mortgage repayments will be assessed by requesting your payslips, bank statements etc to see how much disposable income you will have when taking into account your current mortgage repayment.
The mortgage lender will also consider your credit score and history. As interest-only mortgages are considered riskier than capital repayment mortgages, most mortgage lenders will not lend to borrowers with bad credit and you may need a bad credit mortgage broker to assist you in finding suitable mortgage lenders that may be willing to let you change your mortgage to an interest-only mortgage.
Bad credit could include:
A debt management plan
A home reposession
Arrears on credit products
Yes, you should be able to switch your mortgage to an interest-only mortgage at any time but you should take into account any early repayment charges and the cost of getting an interest-only mortgage.
Can you switch to an interest-only mortgage temporarily?
Some mortgage lenders will allow you to change our mortgage to an interes-only mortgage temporarily if you have a good reason to. This may be because you are going through a period of financial difficulty etc.
If you want to switch your mortgage to an interest-only mrtgage temporarily then youmay want to get in touch with a mortgage broker who will be able to assist you in finding the right mortgage lender for your particular cirucmstances.
How much can I borrow on an interst-only mortgage?
The amount youmay be able to borrow on an interest-pnly mortgage will vary from one mortgage lender to another and will be based entirely on your own mortgage affordability.The mortgage multiples on offer by various interes-only mortgage lenders will also differe based on your personal circumstances. The best way to see how much you may be able to borrow on an interest-only mortgage would be to speak to a mortgage broker who can analyse your personal circumstances and give you an idnication on what they think you will be able to borrow.
You may want to know this if you plan to change your mortgage to an interest-only mortgage and borrow more.
Do I need to have equity to change to an interest-only mortgage?
Most repayment mortgages can be obtained with a 5% mortgage deposit]() and hence the equity needed in that case is 5%of the property value. For interest-only mortgages the equity requirement is kuch higher and you may find many interestonly mortgage lenders looking for mortgages with atleast 25% of equity.
You may still be able to change your mortgage to an interest-only mortgage with little equity but you may need a specialist mortgage advisor to see what your mortgage options are.
Can I change my mortgage to an interest-only mortgage with bad credit?
Chaing your mortgage to an interest-only mortgage with bad credit will depend heavily on your personal circumstances as many mortgage lenders will consider bad credit but wll want to know the details and then consider if to lende on a case by case basis.
Some mortgage lenders will lend to those wit CCJs but will expect that the CCJs have been satisfied whilst some willlend to those with CCJS but will only lend if the total value of CCJs was nder a certain limit.
Can I switch my mortgage to interest only if I have recently changed jobs?
Yes, You may be able to change to an interest-only mortgage if youhave just changed jobs as long as there wasnt a big gap in employement between your curene job amd the last one. The mortgage lender may consider income from the past job and some will even consider you if you are on probation at your current job.
Some mortgage lenders may even consider yo if you have a contract for a future job thats within 3 months.
Can I change my repayment mortgage to interest only if I am self-employed?
Yes, you may be able to change your mortgage to interest-only if you are self employed but most mortgage lenders will require atleast 3 years worth of acconts. There are however some mortgage lenders out there that will offer you a mortgage if you have less than 3 years worth of ccounts but atleast 12 months.
If you have recently just become self emplyed you may fnd that your mortgage options are very limited but under the right cirucmstances you may find a mortgage lender willing to lend to you.
You may want to use a self-employed mortgage broker to get you a mortgage.
Different mortgage lenders also have different ways of assessing your income depending on how you are self-employed. Most mortgage lenders will use your salary and dividends if you are a company director but some can also consider profit that is retained within the business and this could make a significant difference to your mortgage affordability.
Can I change my mortgage from payment to interest only if I am a contractor?
Yes if you are a contractor you may be able to change your mortgage to an interest-only mortgage. You may want to use a self-employed mortgage broker to assess your mortgage options.
Is switching to an interest only mortgage while on maternity leave possible?
Most mortgage lenders may allow you to switch to an interes-only ortgage if you can prove that youare able to maintain the monthly mortgage repayments and have a suitable capital repayment vehicel to pay off the balance at the end of the mortgage term.
Some mortgage lenders will also want to see some evidence of when you will be returning back to work and how this will impact the amount of income you receive per month.
You may ned a specialist mortgage broker to assess your mortgage options and present you with suitable mortgage lenders who may be wlling to consider you.
How do I change my mortgage to interest only?
If you want to change your mortgage to an interest-only mortgage you can either go directly to your current mortgage lender or seek the services of a mortgage broker.
Mortgage brokers will have a wider array of products to choose from than a mortgage lender and may be able to help you if you have a more complex situation such as bad credit.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
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 rather 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 based on your mortgage affordability.
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 as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on 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.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.