Should You Switch From an Interest-Only Mortgage to Repayment?
With an interest-only mortgage, you need a plan for how to pay back the capital when your mortgage ends. One option is to move to a repayment mortgage.
In this article, we’ll look at the differences between interest-only and repayment mortgages and whether you should switch.
Interest-Only vs Repayment Mortgages: The Key Differences
With an interest-only mortgage, you only pay off the interest on your mortgage each month. At the end of your mortgage term, the capital you borrowed is still outstanding. So you need to have a separate way to pay back this money. This is often done with savings or investments.
Repayment mortgages are different because you pay back interest and some of the capital every month. That means that by the time you reach the end of your mortgage term, your mortgage is fully paid off.
Remortgaging with an Interest-Only Mortgage
When you’ve got an interest-only mortgage it can be harder to remortgage.
That’s because since April 2014, lenders pay extra attention to how the capital will be repaid.
They carry out a full affordability assessment to check your plans for repaying the mortgage before they agree to lend you the money.
In short, they want to know that you can afford to repay the mortgage – both the capital and the interest payments.
Why Switch From an Interest-Only Mortgage to Repayment?
If you don’t have a way to repay the capital on your mortgage or your plan looks like it will not provide enough money, you’ll have to think through other options.
One option is to change to a repayment mortgage. This gives you certainty about how your mortgage will be repaid because you’ll pay back some of the capital every month along with your interest payments.
Switching to this type of mortgage also means you could access more competitive mortgage deals with different lenders. With repayment mortgages, lenders know how the capital will be paid back and so can offer better deals.
If you choose to remortgage to a repayment mortgage, it can help to work with a mortgage broker. They will be able to search the market for different mortgage deals that fit with your financial position.
Please Note: As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayments.
If you would like to speak to us about remortgaging or reviewing your existing mortgage, please email us firstname.lastname@example.org.