Switching to an Interest-Only Mortgage

Interest-only mortgages are the main alternative to capital repayment agreements, but what are your options if you want to change an existing mortgage to interest-only? Find out in our complete guide…

Can you change your mortgage to interest-only?

Yes. It is sometimes possible to change your mortgage type from capital repayment to interest-only at your lender’s discretion. If they agree to this, you might be able to switch over without going through the full remortgage process, which can be costly and time-consuming.

There are, however, circumstances where you will need to remortgage to switch to the interest-only payment type. They include the following:

• You don’t fit the criteria for interest-only at your current lender
• Your current lender doesn’t offer interest-only mortgages

Even if your current lender offers interest-only mortgages, it’s wise to shop around before you speak to them about switching. There could be a more favourable deal, with greater flexibility and a lower interest rate available elsewhere.

How to switch to interest-only

Whether you will be sticking with your existing provider or refinancing with a new one, your lender will need to carry out a series of checks before you can switch to interest-only.

They will need to ensure that the following requirements are met:

• You have an acceptable repayment vehicle in place
• You meet the eligibility criteria for an interest-only mortgage

A good place to start is to speak to one of our mortgage brokers to find out exactly what your options are. They will be able to tell you whether you fit the criteria at your current lender, and advise you on whether there is a better interest-only mortgage deal available elsewhere.

What the process involves

You can begin with a free, no-obligation chat with one of our mortgage brokers, during which they will determine whether you’re eligible to switch to interest-only and lay out your options.

It can help speed things up if you calculate your loan-to-value (LTV) ratio beforehand and have evidence of your repayment vehicle, although neither is essential at this stage.

Once your broker has found the ideal lender and deal for you, the next step is to apply to change your mortgage payment type with your current lender, or begin the remortgage process with another provider, depending on which is your best/prefered option.

To determine your eligibility for a switch, your lender will review the following:

• Your repayment vehicle: You won’t be able to switch to interest-only unless the lender approves your plans for settling the mortgage debt at the end of the term. Acceptable repayment vehicles include ISAs and other investments, pension lump sums, the sale of the property, the sale of another property or other assets.
• The amount of equity you have: It will need to be at least 15% to qualify for interest-only as the requirements are higher than they are for capital repayment.
• Your income: The income requirements for an interest-only mortgage can be higher than they are for capital repayment, anywhere between £25k and £75k.
• Other factors: The lender will also review your credit history, age and employment situation to check nothing has changed since you took out your original mortgage. Click on the links provided to learn more about the requirements for each factor.

Your broker will guide you through the final steps to completion, but if you’d prefer to get started by comparing interest-only mortgage deals yourself, choose that option below:

Compare interest-only mortgage deals for FREE

Choose Your Own MortgageSpeak To An Adviser

Can you switch to interest-only temporarily?

Yes. Under the measures introduced under the 2023 Mortgage Charter, it is possible to temporarily change a capital repayment mortgage to interest-only. This option is generally reserved for homeowners who are struggling with their mortgage payments.

Whether your request to switch is approved will be at the lender’s discretion, but if successful, you can make interest-only payments for up to six months.

Changing your mortgage payment type under these circumstances won’t affect your credit reports, but it’s a good idea to talk over the full implications with your lender beforehand.

Our brokers are also available to offer independent advice about whether a temporary switch is in your best interest, and they can inform you of every possible alternative.

The benefits of switching

The main advantages of switching to an interest-only mortgage are as follows:

• Lower mortgage payments: Your monthly mortgage payments will drop when your swapover is complete, as you will no longer be making capital payments.
• More flexibility: Some lenders let you make optional capital payments on an interest-only mortgage, so you can chip away at the debt if you are in a position to that month. Alternatively, you could invest that extra disposable income elsewhere.
• Remortgaging not always necessary: Some of the alternatives to switching might involve a full remortgage, but this isn’t always essential to change to interest-only.
• Can revert back to capital repayment: Some lenders will let you switch to interest-only temporarily or revert back to capital repayment without remortgaging, so changing to interest-only is often a reversible decision for homeowners.

Risks to consider

Changing a mortgage from capital repayment to interest-only might mean lower monthly payments but there are risks to think about as well. They include:

• Paying more overall: As the capital debt remains consistent throughout the term, the amount of interest you pay each month is fixed too. With a capital repayment mortgage, the interest charges decrease in line with the debt, which means that you will pay more for an interest-only mortgage overall, despite the lower payments.
• Higher risk of negative equity: Since the capital debt on your mortgage will not decrease each month on interest-only, you are running a higher risk of falling into negative equity if property prices were to decrease during the term.
• Repayment vehicles can fail: Investments are rarely 100% guaranteed to pay out, and if your repayment vehicle falters, you could be left with no way of settling your mortgage debt at the end of the agreement.
• Criteria can be more stringent: Interest-only mortgages have tighter criteria for LTV ratios, income and age of the applicant. This means that there might be less product choice available if you are switching repayment type.

Which lenders will let you do this?

The majority of UK lenders will at least consider an application to change a mortgage from capital repayment to interest-only, and only a minority don’t offer this repayment type.

Lenders who are unable to offer interest-only include:

• Bluestone
• Norton Homeloans
• Bank of Ireland
• Tandem Bank
• Gen H

Whether you qualify for an interest-only mortgage with one of the lenders not listed above will depend on whether you fit their criteria for this product type. Our mortgage brokers can draw up a full list of the lenders you will qualify for, based on your circumstances.

What your new mortgage payments will be

You can use our interest-only mortgage calculator below to work out what your new mortgage payments will look like after you switch to this repayment type.

Simply enter your outstanding mortgage balance along with a rate and term to get started.

Why choose Teito for your mortgage needs?

If you’re considering switching to an interest-only mortgage, you can compare the current rates on them for free on Teito and discuss all of your options with one of our brokers.

Here are just some of the reasons people choose us for their mortgage needs:

• You can access the latest mortgage rates in seconds
• Our brokers can access exclusive interest-only deals
• We are 5-star rated on leading review websites
• We can help you secure an agreement in principle in minutes

Ready to compare the latest rates and take advantage of a free, no-obligation chat with a broker who specialises in interest-only mortgages? Get started here.