Can I change to interest-only mortgage? What you need to know

6 min Read Published: 15 Feb 2024

Can I change my existing mortgage to interest only?In this article, we explain what you should consider before switching to an interest-only mortgage, how it will affect your monthly mortgage payment and alternative ways to reduce your mortgage payments.

Interest-only mortgage vs repayment mortgage

An interest-only mortgage is one where your monthly payments only cover the interest that accrues against your loan amount, meaning the mortgage balance has to be repaid at the end of the mortgage term.

A repayment mortgage, on the other hand, requires you to pay the interest and some of the capital amount that you borrowed each month. This means that your mortgage balance gradually reduces over the mortgage term, ultimately reducing to zero by the time the mortgage term ends.

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Interest-only mortgage rates vs repayment mortgage rates

The comparison table below shows the differences between a repayment and interest-only mortgage, in terms of both interest rate and monthly repayments.

Repayment mortgage Interest-only mortgage
Mortgage loan amount £200,000 £200,000
Mortgage term 25 years 25 years
Interest rate 4.69%^ 5.86%^
Monthly payment £1,133 £976

^Interest rate based on 80% LTV and a 2-year fixed rate deal - Rates correct on 18/10/2023

You can read more in our article, “What are the different types of mortgages?” and you can search for the best mortgage rates for repayment and interest-only options using our mortgage rate comparison tool.

Things to consider before switching to an interest-only mortgage

If you choose an interest-only mortgage your monthly mortgage payment can be smaller than if you were on a repayment mortgage, so it can seem cheaper. However, you may find that an interest-only mortgage deal charges slightly higher interest rates making the difference in what you pay each month less than you may expect.

There is often a greater risk that your property will fall into negative equity if you are not reducing your mortgage balance by choosing an interest-only mortgage. The difference between the value of your property and what you owe the lender is the equity and if house prices fall, your outstanding mortgage balance could end up exceeding the value of your property.

Importantly, most lenders ask to see a plan for how you intend to repay your mortgage at the end of the mortgage term. You won't have been required to do this if you previously had a repayment mortgage so you should consider how you will achieve this.

Ways to pay off an interest-only mortgage at the end of the mortgage term

The most common repayment methods for an interest-only mortgage are:

  • Equity investments
  • ISAs (Cash and Stocks & Shares)
  • Sell and downsize your property
  • Savings
  • Tax-free lump sum from a pension
  • Endowment policy

If you end up choosing a repayment option that requires a monthly contribution then you may find it difficult to save money when compared to the cost of paying a repayment mortgage. If you are trying to reduce your monthly outgoings by switching to an interest-only mortgage then you should discuss this with a specialist mortgage broker* to understand which mortgage option is best for you.

Can I switch from a repayment to an interest-only mortgage?

Yes, it is possible to switch the type of mortgage you have as long as your lender allows this and you meet the qualifying criteria. You may find it easier to switch mortgage types when your mortgage deal ends but lenders will usually consider mid-deal requests too.

Can I switch to an interest-only mortgage temporarily?

Yes, you may be able to switch to an interest-only mortgage and later revert to a repayment mortgage. You will almost certainly have to make an application to the lender each time you switch mortgage types and the criteria for switching will vary from one lender to the next. It is best to speak with your existing mortgage lender in the first instance but if you are unable to find your ideal mortgage solution this way, you should source a mortgage broker who can provide you with the right advice and guidance.

Borrowers considering a temporary switch from a repayment mortgage to an interest-only mortgage may find support from their lender. In 2023, the government introduced the Mortgage Charter which gained signatories from across the mortgage lending market. The charter encourages lenders to support borrowers who are challenged by their existing mortgage arrangements including "A new deal between lenders, the FCA and the government permitting customers who are up to date with their payments to switch to interest-only payments for six months".

How to switch from a repayment to an interest-only mortgage

If you plan to switch to a different type of mortgage with your existing lender, you should contact them to discuss your options. If it is indeed possible to do so, your lender will direct you to complete an application either online, in a branch or by post. Your application may require you to supply evidence of your income and outgoings to check your affordability as well as a credit check, so it is a good idea to gather your evidence and paperwork as well as check your credit file before you apply. You may even find that it is tougher to qualify for the lending criteria for an interest-only mortgage.

If your lender will not allow you to switch your mortgage type, you could switch lenders to get the mortgage type you need. The best way to do this is by engaging the services of a mortgage broker who will usually have market insight that helps them determine which lenders will facilitate the change to your mortgage. They will also search for the best mortgage deal based on your individual circumstances.

If you do not have a mortgage broker, you can source one in your local area using the professional directory services provided by VouchedFor*. You can search for financial professionals based on customers’ reviews, location or the specific services provided by each adviser.

Are interest-only mortgages a good idea?

Interest-only mortgages can be a good idea because they help to reduce the monthly cost of your mortgage as you are only required to pay the interest that accrues. At the same time, you can build a plan to repay the capital loan in a number of different ways. In some ways, this gives borrowers the freedom to use the funds they would otherwise use to repay the capital loan each month in ways that could reap greater financial rewards. However, you could also find yourself in a position where your investments do not perform as well as you expected, leaving you with a shortfall to pay your mortgage balance at the end of the mortgage term.

Who can get an interest-only mortgage?

Normally, any borrower who can prove they can afford the monthly mortgage payments and has a suitable plan to repay the mortgage balance at the end of the term can get an interest-only mortgage. Additionally, the lender may carry out a credit check and property survey before making a mortgage offer. The loan-to-value (LTV) ratio can also determine whether you can get an interest-only mortgage as some lenders may only lend at lower LTVs of between 60% to 80%. Ultimately, a lower LTV can provide you with more options for borrowing as you are deemed a lower risk for the lender.

Alternatives to switching to an interest-only mortgage

Use savings to reduce the balance of your mortgage

If you have savings it may be wise to use these to pay down your mortgage, especially if you are paying more interest on your mortgage loan than you are earning on your savings account. Do check as savings rates have increased and you may be earning more interest on your savings than you were previously. You can check for the latest savings rates in our article, "Best Savings Accounts in the UK"

Extend your mortgage term

Extending your mortgage term so that you repay your mortgage loan over a longer period of time could result in your monthly mortgage payment reducing. You will however pay more interest in the long run as you will be repaying your mortgage over a longer period of time.

Arrange a part repayment, part interest-only mortgage

A 'part and part' mortgage means that you will be repaying part of your mortgage balance whilst only servicing the interest on the remainder and you can choose how to split your mortgage balance when you do this. It can be a good halfway house that gives you peace of mind that you are reducing some of your mortgage balance while also reducing your monthly mortgage payments. It is a solution that could work for you if you are planning on selling the property to downsize at the end of the mortgage term as it can allow you to build some equity in the meantime.



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