Can you change the type of mortgage you have?
Now that’s a question worth pondering. After all, our circumstances, much like the British weather, can be unpredictable. And when those winds of change do blow, wouldn’t it be nice to have options?
So, can you change your mortgage type?
Well, the straightforward answer is yes. But, as with most things in the world of finance, it’s not quite as simple as that.
Mortgages come in many flavours: fixed-rate, tracker, and interest-only to name just a few. And each comes with its own set of rules, its own benefits and drawbacks, and its own particular brand of small print. Changing your mortgage type, therefore, means navigating these choppy waters with care.
What is an interest only mortgage?
An interest only mortgage might sound like a dream. You only pay the interest? Where do I sign up? But hold your horses, because, as ever, there’s a catch.
In the case of interest only mortgages, you pay, as the name suggests, only the interest on the loan each month. The amount you borrowed, the capital, remains untouched.
Sounds great, doesn’t it?
But it does mean that when the mortgage term ends, you’ll still owe the full amount you originally borrowed.
Each month the lender will only be expecting payments for the interest charged on the mortgage debt. These payments will be quite a bit smaller than the cost of a repayment loan.
There’s no requirement for any capital repayments at all.
As each year passes the mortgage balance remains the same.
At the end of the term the lender will be expecting you to make a full repayment of the whole debt, all in one go.
The repayment of your mortgage is calculated over the term you have chosen (ie 25 years).
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.
As each year of the mortgage term passes your outstanding mortgage amount gradually reduces. The idea is that with the very last mortgage payment your debt is completely settled.
Is it easy to change to an interest only mortgage?
The notion of ‘easy’ is relative, isn’t it? While it might seem straightforward to change your mortgage to interest only, it can be quite a complex process.
First, you need to approach your current lender and explore the possibility of changing your mortgage. Not every lender will agree to convert a repayment mortgage to an interest only mortgage.
Even if your lender is open to the idea, they will want to ensure that you have a credible repayment plan in place to repay the capital at the end of the term. You see, they want their money back, one way or another. This could be a lump sum investment, an inheritance, the sale of another property, or some other means.
Another hurdle is affordability. If your circumstances have changed, perhaps through a drop in income or an increase in outgoings, your lender will want to reassess your mortgage affordability.
Even with all these factors considered, it’s still not a guarantee that you can switch. The lender might not offer an interest only product, or they might only offer it to certain customers. If you have a few problems showing on your credit report then you may need to consider a specialist bad credit mortgage.
The process can be likened to navigating a familiar street, only to find it strewn with unexpected roadworks. There may be diversions and delays, but with patience, and potentially the guidance of a mortgage broker, it can be done.
What happens when my interest only mortgage ends?
How do you repay an interest only mortgage?
Can I change my interest-only mortgage to repayment?
What are the different mortgage repayment methods?
Although repayment mortgages are the most popular, there are actually three ways that a mortgage can be setup. You need to have made your mind up before you apply for a new mortgage as the repayment method forms part of the application form. Also, not all lenders offer all three options.
Is it a good idea to switch?
The decision to switch to an interest only mortgage hinges on your personal circumstances.
In some cases, the switch can provide temporary financial relief, giving you the flexibility to manage your finances more effectively.
In other situations, it could end up costing more in the long run. It’s like choosing between tea and coffee – both have their merits, but the best choice depends on the drinker.
Will you need to remortgage?
Whether you need to remortgage or not when switching to an interest only mortgage will depend on your lender’s policies and your specific circumstances.
You might find it more beneficial to remortgage with a new lender if the overall terms are more favourable. But remember, it’s not just the headline rate to consider. Fees, charges, and penalties can all add up.
What are the disadvantages?
Every silver lining has a cloud, and an interest only mortgage is no exception.
The primary disadvantage? The elephant in the room is the capital you’ll still owe at the end of the mortgage term. That’s a considerable sum you’ll need to account for, and not doing so can lead to significant financial troubles down the line.
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 will my payments change?
Ah, the crux of the matter, isn’t it?
Switching to an interest only mortgage is bound to have a significant impact on your monthly repayments.
Let’s take a moment to imagine, shall we? You’re currently on a repayment mortgage. Each month, part of your payment goes towards the interest, and part towards reducing the capital. Gradually, like a dedicated gardener chipping away at a stubborn tree stump, you’re whittling down the amount you owe.
Now, consider the shift to an interest only mortgage. Suddenly, your monthly payments seem lighter, more manageable. That’s because they’re now only covering the interest.
The capital?
That remains as steadfast as the cliffs of Dover.
What this means for you is that, while your monthly outgoings would decrease, the total amount you owe won’t. Instead, it stays the same throughout the rest of the mortgage term. At the end, you’d need to repay the capital in one lump sum, so it’s crucial to have a solid repayment strategy in place.
So, the shift in payments can feel like relief in the short term, but it’s important to remember the long game. It’s like being offered a cream bun — it might be a delicious treat now, but it won’t help if you’re planning to run a marathon later. Remember, it’s about balancing immediate relief with future responsibilities.
How can you make a mortgage cheaper?
Making your mortgage cheaper might seem like a magic trick, but it’s more doable than you think.
From overpaying when possible to securing a lower interest rate, there are several strategies you can use. It’s not about finding a golden ticket; it’s about making informed, strategic decisions that fit your circumstances.
What does the FCA think?
The FCA, the Financial Conduct Authority, is the shepherd watching over the UK’s financial flock.
In order for interest only loans to be considered suitable, lenders must ensure that borrowers have the capacity and ability to meet the terms of their loan over its lifetime. This includes assessing whether they have enough funds available or can be reasonably expected to save up enough money by the end of the term in order cover off their total mortgage balance.
How can a broker help?
The path to switching your mortgage can feel like a journey through a maze.
But a broker can be your personal guide, illuminating the complex routes and tricky turns. They understand the lay of the land, know the pitfalls to avoid, and have an instinct for sniffing out the best deals.
A mortgage broker can assess your personal circumstances, advise you on the feasibility of switching to an interest only mortgage, and even help you find the most suitable product. They have a well-trained eye to read the fine print that might otherwise escape your notice.
Navigating the UK’s mortgage landscape can indeed be an adventure, with its highs and lows, unexpected turns, and the occasional bump along the way. But remember, it’s your journey. Having the right information and guidance can make it a lot less daunting and a lot more rewarding.
So, if you’re considering a switch to an interest only mortgage, take a breath. Think. Consult with a mortgage expert. It might be the best thing for you, or it might not. But either way, you’ll be making an informed decision. And when it comes to managing your money, that’s the best step you can take.
Are you ready to explore your mortgage options? Reach out to a professional today to help you chart your course in this intricate yet exciting financial journey.
Ready to explore your options?
If you’re just about to start a new mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
