When thoroughly evaluated and planned, interest-only mortgages are pretty convenient. They enable borrowers to buy a property with significantly lower monthly payments. Quite tempting, yes?
Well, the problem with an interest-only mortgage is that the original amount borrowed doesn’t decrease over time, because you are not actually paying any of it back.
When the term of your mortgage expires, you must pay it off in full.
That’s why many borrowers ask us, “Can I change my interest-only mortgage to repayment?” In this article, we’ll go over everything you need to know about switching repayment methods. We’ll also explain how a mortgage broker can help in making this process easier for you, so keep reading!
You will find more useful information in our article: “What are the different mortgage repayment methods?“
How does a repayment mortgage work?
With a repayment, or capital & interest, mortgage you repay the amount borrowed (the capital) plus the interest over the mortgage term via your monthly repayments. Each month you pay the interest and some of the capital off, so the amount you owe gradually reduces.
The lender works out how much interest and how much capital you need to pay to keep to the agreed term and this is combined into one monthly payment. At the start you won’t be paying much capital off but after a few years this changes so that more of the monthly payment goes towards paying back the debt. Your overall monthly payment amount won’t change unless the interest rate changes.
Can I Change My Interest-Only Mortgage to Repayment?
The short answer is yes.
Switching from an interest-only mortgage to a repayment mortgage is fairly common. The majority of mortgage lenders accept and even prefer this switch, so it’s more of a win-win situation.
From lenders’ perspective, receiving repayments gives them an added assurance that they’ll be paid back. From borrowers’ perspective, instead of paying the mortgage principal in one lump sum, they’ll gradually reduce their mortgage balance at an affordable pace.
The first and easiest thing to do is to ask your current lender if they are willing to convert your interest-only mortgage to a repayment mortgage. That is while keeping the same deal and interest rate.
This is usually not a problem if you provide proof that you can meet the new higher repayments. That said, to broaden your options, there are primarily three other ways to change mortgages that you can explore:
It’s necessary to evaluate all available routes in order to determine how manageable they’ll be in the short and long term. You see, changing mortgage types is usually not complicated; however, selecting a method of switching that isn’t suitable for you is.
If you didn’t analyse your finances and come up with a solid plan to cover the new repayments, you may be forced to make some difficult decisions. For example, you might consider downsizing, which means selling your current home and moving to a smaller, less expensive one.
Now, let’s take a closer look at the three main processes for converting your interest-only mortgage to repayment!
What Is Remortgaging?
Simply put, a remortgage is a process of taking out a new mortgage from a different lender to replace your existing mortgage, while remaining in the same property. However, you should carefully review your mortgage contract first because some lenders charge a fee for leaving them.
In many contexts, remortgaging is the default option for mortgage borrowers. For example, it can be a viable solution if you want to take out additional loans against your property. It also comes in handy when you need extra money to make home improvements.
In this case, where you want to get out of an interest-only mortgage, a remortgage may also be the answer. You might even get a better deal that lowers your overall payments.
This is especially true if the value of your property has increased since you first acquired it. Because if so, this means that your loan-to-value (LTV) ratio may have changed, allowing you to pursue more deals with lower interest rates.
Remortgaging Limitations
Switching your mortgage to a new lender will incur costs, so it has to be financially worthwhile.
In these circumstances a borrower is probably looking to achieve a combination of: a new interest rate, switching over to repayment and possibly borrowing a bit more.
Maybe your current lender is one which provided your loan as you had some bad credit. If this issue has now been cleared then it is a good opportunity to remortgage over to a prime lender, and on to a better rate.
What Is Product Transfer?
A mortgage product transfer is the replacement of your current mortgage agreement with a new one from your current lender. You simply negotiate with your current provider to get a more favourable deal with better interest rates.
Borrowers usually turn to this option when they don’t meet all of the remortgage eligibility/affordability requirements. You see, product transfer is, in essence, a remortgage with the same lender.
Nonetheless, when compared to remortgaging, this process may be quicker, less formal, and more affordable.
In a nutshell, there’s generally no need for full valuation of the property, which usually takes time when remortgaging. Besides, there’ll be less paperwork and little to no legal work. Not to mention that the associated expenses pale in comparison to those related to remortgaging.
Product Transfer Limitations
Although product transfers appear to be a reasonable solution, they’re not always the best. To begin with, you’ll be limited to the deals that your current lender is willing to offer. You won’t have access to as many options as you would with a remortgage.
Therefore, there’ll be a slim chance of taking out a new mortgage that meets your needs or has the best interest rate on the market.
Additionally, since valuations are unlikely to take place during product transfers, you won’t know the exact current value of your home.
Knowing this information can be beneficial, especially if the value of your home has increased. As previously noted, this increases the likelihood of obtaining more and better mortgage deals.
What Is a Part-And-Part Mortgage?
Part-and-part mortgages are basically a hybrid of interest-only and repayment mortgages.
Put differently, taking out this mortgage enables you to pay off portions of the original loan along with the interest rate each month. It’s worth noting that you don’t get to pay the entire loan amount.
A part-and-part solution simply offers the best of both worlds. Since you’ll be paying some of the balance as you go, the amount of interest added will be lower than with an interest-only mortgage.
Not only that but when your mortgage term comes to an end, the amount of money initially borrowed will be remarkably reduced.
At the same time, your monthly payments will be lower than in a traditional repayment mortgage. You can talk to your current lender or a new provider about switching your only-interest mortgage to a part-and-part mortgage.
How do part and part mortgages work?
Part-And-Part Mortgage Limitations
Taking out a part-and-part mortgage usually has few implications. The fact that a portion of the original loan still needs to be repaid in full when your mortgage term is over is the only significant drawback.
As a result, if the amount borrowed was initially large, this could pose a problem. More specifically, it’ll be inadequate if the loan exceeds your estimated future finances, even when reduced.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
How Can a Mortgage Broker Help You Change Mortgages?
Switching mortgages is a daunting process for borrowers with little experience in the mortgage market.
Since you’ll be looking for a different agreement, you’ll be dealing with either your current lender or a new mortgage provider. In both cases, their advice is unlikely to be impartial and solely for your benefit.
Thus, seeking the guidance and support of an expert is extremely beneficial in navigating these options.
Here are three major benefits of using a mortgage advisor to change your interest-only mortgage to repayment:
Conducts Extensive Research
Finding the best method for changing your current mortgage can be quite a hassle. It takes a lot of time and effort to examine various lenders’ deals and then compare them to one another.
This research can be efficiently done on your behalf by a mortgage advisor. They have the necessary industry knowledge as well as connections to find valuable, and relevant information more quickly.
Set You on the Right Track
Your broker will know exactly where to look after assessing your financial situation.
If new lenders are required for switching mortgages, your advisor will select the ones with the best chances of approval.
Being pointed in the right direction from the start is invaluable. One of its perks is that it saves money that would’ve been lost on an ineffective switching process. Even better, it keeps rejections off your credit report.
Works Around Tough Scenarios
As you know, changing from an interest-only mortgage to a repayment mortgage raises your monthly payments. Consequently, almost all lenders will want to ensure that you’ll be able to handle these payments.
It becomes more challenging to get approval if you currently have low income, bad credit, or other issues that affect overall eligibility.
Mortgage advisors are proficient when it comes to lenders and their requirements. If they discover any eligibility issues, they’ll try to find you deals from providers who are more accommodating of your situation.
Bottom Line
You now have all of the answers to the question, “Can I change my interest-only mortgage to repayment?” There are a few ways to achieve this, but their effectiveness varies depending on the situation.
Paying off any mortgage in one go would be a struggle for most people. So moving over to a repayment solution that suits your budget and chips away at the balance can only be a good thing.
Your mortgage broker will be able to help you decide which option is most affordable.
