Many borrowers who have an interest-only mortgage may consider switching to a repayment mortgage. This is because while interest-only payments are lower, it can cost more in the long run and the repayment vehicle may not always be reliable.
This article will provide information on why some lenders encourage switching, the steps to take when transferring your mortgage, and how using a whole-of-market broker can help you secure the most cost-effective deal.
Table of Contents
- 1 Repayment methods explained
- 2 How do you change mortgage type?
- 3 Can you convert an interest-only mortgage to repayment?
- 4 Can you switch mortgage anytime?
- 5 Will your lender allow you to switch?
- 6 Switch to a part-and-part mortgage
- 7 Will you need to remortgage?
- 8 Do you need a solicitor?
- 9 How a broker can help you to switch
Repayment methods explained
There are typically two main repayment methods to consider: capital and interest (repayment), and interest only.
capital and interest
The capital and interest repayment method is the most common and straightforward option. With this method, you will pay back both the interest and a portion of the capital each month. This means that over time, the capital will be gradually reduced and your mortgage will be fully repaid by the end of the term.
This is a popular choice for those who want the peace of mind of knowing that their mortgage will be fully repaid.
The interest only option is not so straightforward. Your monthly payments will be cheaper, as you are not making any payments towards the mortgage balance.
The amount you owe at the beginning will be the same at the end.
Interest only mortgages require a separate strategy for repayment of the mortgage debt. Often this is:
- From savings and investment
- Sale of other assets or property
It is important to note that this method requires careful planning and a solid investment strategy, so it may not be suitable for everyone.
How do you change mortgage type?
Changing from an interest only to a repayment mortgage can seem daunting, but with the right guidance and planning, the process can be relatively straightforward.
The first step is to speak with your current lender to understand their requirements and procedures for switching mortgage types. Some lenders may have specific criteria or fees that must be met before they will allow you to change.
You will also need to review your current financial situation and determine if you can afford the higher monthly payments that come with a repayment mortgage. This will involve looking at your income, expenses, and overall debt levels.
There are two ways of making the alteration:
Ask your current lender – This may be the simplest option, although not necessarily the best. Your lender will be pleased that you are switching to a capital and interest method, but they will need to be convinced that it is affordable for you.
Remortgage to a new lender – You may need to do this if your existing lender cannot help, or it may be that remortgaging to a new lender is more cost effective.
Can you convert an interest-only mortgage to repayment?
Yes, it is possible to convert an interest-only mortgage to a repayment mortgage. Many homeowners choose to switch from an interest-only to a repayment mortgage for a variety of reasons, such as wanting the peace of mind that their mortgage will be fully repaid by the end of the term, or because their financial situation has changed and they can now afford higher monthly payments.
It’s also important to mention, that some lenders may not accept the conversion of interest-only mortgages to repayment mortgages, in this case, you will have to consider other options such as remortgaging with a different lender.
Can you switch mortgage anytime?
It is possible to switch mortgages at any time, but it is important to understand that there may be certain factors that can affect your ability to do so.
Staying with your current lender would pose the least problems. You really will only need to pass their affordability assessments.
Remortgaging to a new lender would also involve financial checks but in addition your loan to value (LTV) will be very important. This is the size of your mortgage in relation to your property value.
Another important factor to consider is the early repayment charges (ERC) that may be imposed by your current lender if you choose to switch mortgages before the end of your current mortgage term. The ERC is a penalty fee that is charged by the lender when you repay your mortgage early or switch to another lender before the end of the term. The amount of the ERC will depend on your current lender and the terms of your mortgage.
Will your lender allow you to switch?
As mentioned previously, an existing lender will primarily be concerned about your ability to maintain the higher monthly payments.
While the Financial Conduct Authority prefers borrowers to have a repayment mortgage, this must be affordable, and so the lender will need to thoroughly check this by asking about your income and your expenditure.
Switch to a part-and-part mortgage
If you’re unable to switch your entire loan to a repayment mortgage, you can consider switching part of it. This can be done with your current lender or a new lender.
A part-and-part mortgage is a combination of repayment and interest-only. It allows you to maintain manageable monthly repayments while also reducing your balance and lowering the burden of the end of your interest-only term.
A part-and-part mortgage is structured by dividing the loan into two parts: a repayment portion and an interest-only portion.
The interest-only portion of the loan must be paid off at the end of the mortgage term, either by selling the property, refinancing or by using a separate investment vehicle.
Will you need to remortgage?
When switching from an interest-only mortgage to a repayment mortgage, you may need to remortgage. Remortgaging means taking out a new mortgage with a different lender in order to pay off your existing mortgage.
You may need to re-mortgage if your current lender can’t do what you want, or perhaps they are more expensive than others.
You may find our Remortgage Guide useful.
Do you need a solicitor?
In most cases, the process of switching mortgages can be done directly with your lender and does not require the services of a solicitor.
However, if you are remortgaging to a new lender, you will need a solicitor to ensure that the legal process is carried out correctly and that your interests are protected.
A solicitor will be able to guide you through the legal process of remortgaging, including reviewing and explaining the mortgage agreement.
How a broker can help you to switch
An independent mortgage broker, such as ourselves, can help you to navigate the complex process of switching from an interest-only to a repayment mortgage, and can help you to find the best deal.
One of the main benefits of using an independent mortgage broker is that they have access to the widest range of mortgage products from different lenders. This means that they can help you compare different options from thousands of offers. They can also help you understand the different repayment methods and assist you in selecting the best one for your individual circumstances.
They can assist you with the application process, guide you through the legal process, and help you to understand the different fees and charges that may be associated with switching mortgages.
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