Are you looking to change your mortgage from repayment to interest only? If so, you’re not alone. Many homeowners in the UK are considering this option as they try to find ways to reduce their monthly payments and make their finances more manageable.
But before you jump into making such a big decision, it’s important that you understand all the factors involved. There are both pros and cons for switching your mortgage type, and there are also certain conditions which must be met in order for it to be possible.
In this article we’ll explore what those conditions are and how changing from repayment to interest-only could affect your financial situation in the long run.
Table of Contents
- 1 Can you change the type of mortgage you have?
- 2 What is an interest only mortgage?
- 3 Is it easy to change to an interest only mortgage?
- 4 Is it a good idea to switch?
- 5 Will you need to remortgage?
- 6 What are the disadvantages?
- 7 How can you make a mortgage cheaper?
- 8 What does the FCA think?
- 9 How can a broker can help
Can you change the type of mortgage you have?
The short answer is yes, it’s possible to switch from a repayment mortgage (capital and interest) to an interest-only mortgage. However, this isn’t something you can do overnight – you will need your lender’s permission in order for the switch to take place.
In most cases, lenders will require evidence that you have enough funds available to pay back the loan at the end of it’s term. If your circumstances have changed since taking out the original loan and you don’t meet their criteria for switching from repayment to interest only, then they are likely to refuse your request.
What is an interest only mortgage?
An interest only mortgage is a loan in which the borrower pays only the interest on the amount borrowed each month, rather than also making payments towards the original amount borrowed. This type of loan can be beneficial for those who have limited funds to make regular repayments, or who want to temporarily lower their monthly repayments.
With an interest-only mortgage, borrowers can take out a larger loan than they would otherwise be able to afford with a repayment mortgage.
It’s important to note that with an interest-only mortgage, you are not reducing your overall debt and will still need to pay off the full balance of your loan at some point.
To do this, it’s essential that you have a plan in place to accrue enough money when the term ends. This could include setting aside savings each month into an investment account specifically set aside for paying off your mortgage balance at maturity. It could also include using other investments such as stocks or property as collateral against your mortgage balance if necessary.
Some lenders may be reluctant to offer an interest only option depending upon your credit score and other factors such as how much equity you have in your home.
Is it easy to change to an interest only mortgage?
Changing to an interest only mortgage can be a useful option for those looking to reduce their monthly payments, however it is important to understand what is involved before making the switch.
The process of changing repayment method requires the lender to conduct affordability checks and may require certain conditions such as having adequate equity in your home or demonstrating that you have sufficient funds available at some point in time.
The lender will also want to know the reason why.
Is it a good idea to switch?
It’s important to weigh up the pros and cons of switching from a repayment mortgage to an interest only loan, as this will have an impact on your overall financial position. Before making the switch, consider these key factors:
1. Savings – Switching to an interest only loan may provide you with short-term savings by lowering your monthly repayments. However, remember that you’ll still need to pay off the entire loan at some point in time so it’s important that you set aside enough funds each month in order to do this.
2. Risk – With an interest-only mortgage, there is more risk involved as you are not reducing your overall debt and will need to find a way to make up any shortfall when the term ends. This could mean having additional investments such as stocks or property available if necessary in order to settle the balance of your loan at maturity.
3. Interest Rates – It’s essential that you check what interest rates are available and compare them against other products on the market. Make sure you take into account any fees and charges associated with each product before deciding which one is best suited for your needs.
4. Repayments – Consider whether or not changing from repayment mortgages to interest-only loans would be suitable for your current situation and whether or not it could help reduce your monthly outgoings in the short term. Also remember that when making such a switch, lenders may require borrowers have sufficient equity in their home and/or demonstrate that they have enough funds available to service the whole loan at some point in time, so bear this in mind when assessing potential options available.
Why not read our article Interest only mortgage vs repayment: Which is best? for some further insight into these two types.
Will you need to remortgage?
Changing to an interest only mortgage can be a great option for those looking to reduce their monthly payments. However, it is important to understand all factors involved before making such a switch.
One of the primary facts to understand is whether or not you need to remortgage in order to do so. While some lenders may offer existing customers the opportunity to switch to an interest only repayment method, others may not.
If your current lender will not permit the change then you will need to switch to a new lender, this is called remortgaging.
For those looking at remortgaging, there are certain criteria which must be met before you will be approved by a lender. These include having adequate equity in your home and proving that you have enough funds available over the remainder of the loan term to repay the full amount at maturity. In addition, lenders may also require borrowers have a good credit score in order for them to qualify for an interest only loan and could impose tougher restrictions than usual depending upon your individual circumstances.
It’s worth bearing in mind that if you do remortgage there will likely be additional costs associated with doing so such as legal fees and valuation charges which should be taken into account when calculating how much your total repayment will come to.
What are the disadvantages?
In addition to the potential need of having to remortgage and any associated costs that come with this, there are also certain disadvantages associated with switching to an interest only loan.
If you do switch then you will not be reducing your overall debt and as such you will need to find another way of paying off the entire loan amount when the term ends.
As the mortgage balance does not decrease each year, the overall cost of an interest mortgage is higher, as you will pay more in interest payments.
The consequence of not reducing your mortgage means that your equity, the part of your property that you own outright, can only increase if property prices rise.
How can you make a mortgage cheaper?
As well as switching to an interest-only loan, there are a number of other ways you can reduce your monthly mortgage repayments.
One option is to look for mortgages with lower interest rates, either through refinancing or switching to a new lender altogether. This could potentially save you a considerable amount each month and may be worth exploring if you’re looking for more affordable options.
You could also consider opting for a longer repayment term in order to reduce the monthly costs. A longer term will mean that the total amount repaid over the course of the loan is higher but it can also help to bring down your short-term outgoings while helping you avoid an unaffordable lump sum at maturity. This only works with a repayment mortgage as the monthly payment for interest-only are the same regardless of the mortgage term.
It’s important to bear in mind, however, that by extending the length of your mortgage term you will be paying more money overall so it’s never advisable to commit to a longer loan than necessary in order to gain short-term savings.
If you have spare cash each month, or maybe some savings, then an offset mortgage could make your mortgage cheaper. An offset mortgage will allow you to ‘offset’ the amount of money in your savings account against the remaining mortgage balance, which will in turn reduce the overall interest you pay. This could be a great option if you have money available to put towards your loan but want to keep it accessible and not locked away in a long-term savings product such as an ISA or pension.
Finally, many lenders now offer ‘overpayment’ options which allow customers to make additional payments each month on top of their regular repayments. By making extra contributions, this can help to reduce your loan term and subsequently save you money over time. However, it’s important that you check with your lender first as some may charge early repayment fees for any lump sums paid off before your product ends.
What does the FCA think?
The Financial Conduct Authority (FCA) is a regulatory body in the UK responsible for protecting consumers and ensuring that firms providing financial services to the public do so in an honest, fair and transparent manner.
One of these rules relates specifically to interest-only mortgages. For borrowers looking to switch from a repayment mortgage to an interest-only loan, the FCA requires lenders to consider both affordability and suitability before approving such requests. 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.
In addition, lenders must also assess whether any additional borrowing would be affordable for borrowers in light of their income, expenditure and other obligations. The assessment also needs to take into account any potential changes in financial circumstances that may occur during the life of the loan. If a borrower is found not to have sufficient funds available or be able afford additional borrowing then an interest only loan may not be suitable in such cases.
Furthermore, where applicable, lenders must explain that switching from repayment mortgages can increase a borrower’s risk should they not meet the full balance on maturity due lack of savings or changes in financial position. They must also advise borrowers on any alternative options which may be more suitable for them based on their individual circumstances.
Ultimately it is important for borrowers looking at making a change from repayment mortgages to interest only loans understand all aspects involved with such decisions before committing themselves financially – including understanding all conditions required by their lender as well as any associated risks – so that they are able make informed decisions about what is best for them in such situations.
How can a broker can help
Using a whole of market mortgage broker can be hugely beneficial when you’re looking to change your mortgage. These experienced professionals have access to thousands of deals from the entire market, meaning they can quickly compare every single option available and find the right one for your needs – saving you both time and money in the process!
Not only this but with their wealth of knowledge and access to exclusive deals, a good broker will also be able to provide tailored advice for your situation that takes into account any special requirements or conditions you may have – ensuring you get the most competitive rate on offer.
As well as technical expertise, brokers also offer invaluable customer service; providing ongoing support before, during and after the application process so that customers feel comfortable throughout what can otherwise be an overwhelming experience.
Ultimately then, if you’re considering making changes to your current mortgage agreement it pays dividends to consult with an experienced who is qualified in all aspects of mortgages from lenders across the spectrum.
With their guidance it couldn’t be easier or quicker to secure yourself a deal that best meets both your financial needs and lifestyle requirements – giving peace of mind now as well as into the future!
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