can I switch to interest only mortgage?

February 8, 2024

197
Yes, you can switch from a repayment mortgage to an interest-only mortgage, subject to your lender’s approval. This switch would mean that your monthly payments would cover only the interest on your loan, not reducing the principal amount borrowed. At the end of the mortgage term, you would still owe the original amount borrowed and need a repayment strategy in place to pay off the capital.

Considerations

Lender’s Approval:

The decision to allow the switch depends on your lender’s criteria and policies. You’ll need to meet their requirements, which may include proving you have a credible plan for repaying the loan at the end of the term.

Repayment Strategy:

Lenders will require a clear and credible repayment strategy for the capital at the end of the mortgage term. Acceptable strategies can include investments, savings plans, or the sale of the property.

Affordability Checks:

You may have to undergo affordability assessments, similar to applying for a new mortgage. This is to ensure you can meet the interest payments and have a viable plan for the loan’s capital repayment.

Financial Implications:

While switching to an interest-only mortgage can lower your monthly outgoings, it also means you’re not reducing the mortgage principal. You’ll need to have a robust plan for how you’ll repay the principal at the end of the term.

Mortgage Term:

Consider whether you’re willing or able to extend your mortgage term if required by your lender as part of the switch.

Interest Rates and Fees:

There may be different interest rates applicable to interest-only mortgages, and switching could incur fees or charges. It’s essential to understand these costs and factor them into your decision.

Steps to Switch

Review Your Finances:

Assess your financial situation and the reasons for wanting to switch to an interest-only mortgage. Ensure you have a plan for repaying the capital.

Consult Your Lender:

Contact your current lender to discuss the possibility of switching. They will outline their criteria, the process involved, and any potential costs.

Provide Required Information:

You may need to provide detailed information about your repayment strategy for the loan’s capital, along with any other documentation required by the lender.

Consider Financial Advice:

Given the implications of switching to an interest-only mortgage, consulting with a mortgage broker can provide valuable insights and help you make an informed decision.

Assess the Offer:

If your lender agrees to the switch, carefully review the terms, interest rates, and any fees associated with the new mortgage arrangement. Switching to an interest-only mortgage can offer short-term financial relief by reducing your monthly payments, but it’s crucial to have a solid plan for repaying the mortgage capital. It’s also worth considering whether alternative strategies, such as remortgaging to a better rate, making overpayments, or switching to a different type of mortgage product, might better suit your financial goals and circumstances.

Answered by:

Alison Gibson

Ascot Mortgage Expert

Last Updated:

18.03.2024

Answered by:

Alison Gibson

Ascot Mortgage Expert

Last Updated:

18.03.2024

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