Switching To Interest Only Mortgage Explained

Life can throw all sorts of challenges your way, and sometimes cutting down on monthly expenses is just what you need.

If you’re feeling the pinch and want to reduce your mortgage payments for a while, switching to an interest-only mortgage could help. It gives you a bit of breathing room without locking you into higher payments. 

Ready to find out how? Let’s walk through the steps.

Can You Change Your Mortgage to Interest Only?

Yes, you can. But it’s not just a matter of ticking a box. 

Switching to an interest-only mortgage involves making sure you fully understand how it works and if it suits your situation.

The key is to check with your lender first. They’ll tell you if this option is available and whether you meet the requirements. 

If you’re only after short-term relief, some lenders will let you switch for a limited time—usually 1 to 2 years.This is especially helpful if you’re facing a short-term financial crunch. 

But when the time’s up, you’ll need to switch back to a repayment mortgage or pay off the loan. 

Keep in mind, the longer you’re on interest-only, the higher your payments will be when you go back to repayment.

So, it’s important to have a plan in place before making the switch.

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Mortgage Interest-Only vs Repayment: What’s the Difference?

Let’s keep it simple.

With a repayment mortgage, each month, you chip away at both the interest and the loan amount (the capital). 

By the end of the term, happy days—you’ve paid off the whole thing!

In contrast, an interest-only mortgage does exactly what it says on the tin: you only pay the interest on the loan each month, not the loan itself. 

Sounds like a good deal, right? 

Well, it can be, but there’s a catch—while your monthly payments will be much lower, you’ll still owe the full amount you originally borrowed when your mortgage term ends. 

At that point, you’ll need a solid repayment plan to pay off the entire loan. This might mean selling your property or using investments or savings.

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Now, the question is, which one is best for you: mortgage interest-only vs repayment? 

Let’s dig a little deeper. 😀

Why Would You Consider Switching to Interest-Only?

Life has a funny way of throwing curveballs. Maybe your income has taken a hit, or perhaps you just need to reduce your spending for a while. 

Switching to an interest-only mortgage could be a way to ease the financial pressure.

After all, it lowers your monthly payments, freeing up cash for other things—whether it’s covering living expenses or saving for a rainy day.

But when does it actually make sense to make this switch? 🧐

Let’s look at some specific situations where switching to interest-only could be the right move:

• Temporary money problems: If your income has dropped for a while due to something like losing a job, being unwell, or working fewer hours, switching to interest-only can give you some breathing space until things get better.
• More cash in hand: If you need extra money each month, an interest-only mortgage can lower your payments, leaving you with more cash to spend on other things or save for the future.
• Paying off other debts: If you have other loans with high interest, lowering your mortgage payments can help you focus on paying off those first, making it easier to manage your overall finances.
• Investing elsewhere: Some people choose an interest-only mortgage to have more money to invest. The savings from lower payments can be put into something that earns more than the interest on the mortgage.
• Selling your home soon: If you plan to sell your property soon, switching to interest-only can keep your payments low while you wait for the sale to go through.
• More flexibility in retirement: For older homeowners, switching to interest-only can help free up money for daily expenses without dipping into savings too much, especially if they plan to downsize or sell the home later.

But here’s the thing: when you switch to interest-only, you’re delaying the inevitable. 

Eventually, you’ll need to pay off the full loan, so it’s crucial to have a plan in place. 

Whether that’s selling the property, using other assets, or tapping into investments, your lender will want to know how you intend to pay back the debt.

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What Do Lenders Look For?

Lenders aren’t handing out interest-only mortgages to just anyone. You’ll need to tick a few boxes before they say yes, and here’s what they’ll be checking:

Equity in your home

Most lenders want you to have a good chunk of your home’s value paid off before allowing a switch. This is called equity. 

Typically, they look for at least 25% equity, but some might ask for 40% or more. 

For example, if your home is worth £200,000, you’d need at least £50,000 in equity to meet the 25% requirement.

Solid repayment plan

Since you’ll only be paying off the interest each month, lenders need to know how you plan to pay back the full loan at the end of the mortgage term.

This could be:

• Savings: Regular payments into a savings account or ISA
• Investments: Stocks, shares, or investment funds
• Selling the property: If you plan to downsize or move
• Pension lump sum: Using part of your pension when you retire
• Sale of other assets: Like another property or valuable items

Lenders will want to see proof of these plans, such as recent statements or valuations.

Income requirements

Some lenders have minimum income thresholds. This is usually between £75,000 and £100,000, depending on the lender.

If you’re applying with a partner, they might look at your combined income. The idea is that you need to be earning enough to comfortably manage the payments and still have a plan for repaying the loan in the future.

Good credit history

Lenders will check your credit score and history. They want to see that you’re good at managing money and paying bills on time. 

You don’t need a perfect score, but a good credit history will help. If you have missed payments or defaults in the past, it might be harder (but not impossible) to switch.

Age and time left on mortgage 

Some lenders have age limits for when the mortgage ends. This is often around 70-75 years old. 

They’ll also look at how long you have left on your current mortgage. If you’re near the end of your term, it might be harder to switch.

Affordability

Even though you’ll be paying less each month, lenders still need to check you can afford the interest payments. 

They’ll look at your income and outgoings to make sure you have enough left over each month.

Meeting these requirements gives lenders confidence that you’re financially secure and can handle the responsibility of an interest-only mortgage. 

If you don’t quite fit the bill, it’s worth chatting to a qualified mortgage broker. Different lenders have different rules, and a good broker might help you find the right one for your situation.

How To Switch to an Interest-Only Mortgage?

Switching can be pretty straightforward, but it depends on your lender.

Here’s what you need to do:

1. Chat with your lender. Give them a call or drop them an email. Ask if they allow switches and what’s involved. Some might let you switch without a fuss, while others might want you to go through the whole remortgaging process.
2. Have a plan. You need to show your lender how you’re going to pay off the mortgage when the interest-only period ends. This could be through investments, savings, or selling the property. They just want to make sure you’ve got a solid plan.
3. Meet their criteria. Most lenders will want you to have a certain amount of equity in your home and meet their income requirements. The exact amounts can vary, so be prepared to prove you meet their standards.
4. Expect some fees. There might be a few admin fees involved in switching. Make sure you ask about these upfront so there are no surprises later.

Once you’ve ticked these boxes, you should be good to go! 

It’s always a good idea to double-check everything with your lender to make sure you’ve got all the details.

What Are the Pros and Cons of Changing to Interest-Only?

Before you decide if switching to an interest-only mortgage is the right move, let’s look at the good and bad sides:

Pros

• Lower Monthly Payments. Paying only the interest can dramatically reduce your monthly mortgage bill.
• More Flexibility. It’s a great option if you need more financial flexibility in the short term, especially if your income has taken a dip.
• Potential to Invest Elsewhere. With lower payments, you could use the extra cash to invest in other areas or build up savings.

Cons

• The Loan Remains. You’re not paying off the actual loan, which means the full amount will still be due at the end of the mortgage term.
• Risk of Negative Equity. If property prices fall, you could owe more than your home is worth, which makes it tricky to sell or remortgage.
• Increased Interest Costs. While your monthly payments are lower, you’ll end up paying more interest over the life of the mortgage.

Can You Change Back from Interest-Only to Repayment?

Yes, you can.

If you’re currently on an interest-only mortgage and decide it’s time to start chipping away at that debt, you can switch back to a repayment mortgage.

Just bear in mind that your monthly payments will increase since you’ll be paying both the interest and the loan itself.

But, the good news is: No more looming debt hanging over your head.

Switching back to repayment is a good move if you’re in a more stable financial position and want to make sure the mortgage is paid off by the end of the term. 

Plus, it gives you the security of knowing you’re gradually reducing what you owe.

>> More about Changing From Repayment to Interest Only Mortgages

What Are the Alternatives to Switching to Interest-Only?

If switching to interest-only isn’t your cup of tea, there are other ways to lighten your financial load:

1. Extend your mortgage. You can make your monthly payments smaller by spreading them out over a longer period. Just remember, you’ll end up paying more interest in total.
2. Part and part mortgage. This is like a mix of interest-only and repayment. You’ll pay interest on one part of your mortgage and repay the capital on the other. It’s a good option if you want to lower your monthly payments but still make progress on your mortgage.
3. Mortgage holiday. Some mortgages let you take a break from payments or pay less for a short time. Keep in mind that you’ll still have to pay back what you missed later on.
4. Remortgage. You could switch to a new lender or stay with your current one but get a better deal. This might mean finding a lower interest rate or changing how you pay your mortgage.

The Bottom Line

Switching to an interest-only mortgage can be a lifesaver if you’re feeling the pinch, but it’s not without its challenges. It reduces your monthly payments but leaves you with the full loan to repay later.

It’s great for short-term relief, but you’ll need a solid plan to clear the debt when the time comes. Whether you’re going through a financial rough patch or simply looking to free up some cash for other projects, interest-only mortgages offer flexibility. 

Just make sure you weigh up the pros and cons before making the switch—and chat with a good mortgage broker to get tailored advice.

They can:

• Look at your finances and guide you through the best options for your situation.
• Point you towards the lenders most likely to approve your switch.
• Help you avoid extra fees and find the best deals.
• Take care of the paperwork, saving you time and hassle.

Looking for the right broker? Get in touch with us. We’ll connect you with a reliable broker who can help you solve your specific mortgage situation.