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Switching to a Repayment Mortgage from Interest-Only

How easy is it to switch from an interest-only mortgage to a repayment product, and when might this be a good move regarding your financial security and total repayment costs?

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2024-06-15
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Switching to a Repayment Mortgage from Interest-Only

In some cases, an interest-only mortgage borrower might wish to switch to a traditional repayment mortgage.

There are lots of options to doing so, and we'll cover the essential information in this guide.

For personal advice about remortgaging from interest-only to repayment, contact Revolution Brokers on 0330 304 3040 or email the team at [email protected].

In What Circumstances Can I Switch from Interest-Only to Repayment?

Any borrower can remortgage, with the key being to apply to a lender whose eligibility criteria you meet.

The switching process depends on the provider, and whether you are moving to an entirely new lender, or taking out a new product with the same lender.

You can also change from interest-only to a part and part mortgage, with an element of capital repayment and an interest-only element combined.

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Single or joint mortgage?
What’s your yearly income?

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about your mortgage

Based on your yearly income,
you may be able to borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

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Are There Benefits to Switching to Repayment Mortgages from Interest-Only?

There are; for example:

  • Being able to borrow a more considerable mortgage amount, with the lower risk factor.
  • Increase your repayments to bring down your mortgage balance.
  • Grow equity owned in your property, which is not possible through interest-only borrowing.

Do I Need a Minimum Amount of Equity to Switch to a Repayment Home Loan?

You won't necessarily need a minimum amount of equity; and this is a positive, given that an interest-only mortgage doesn't offer any form of equity growth though the repayments since none of the capital balance is being repaid.

Unless the property market has grown, the property is likely to require the same repayment mortgage value as the original interest-only borrowing.

However, if you switch and find that your property is now valued at a higher value, you can apply for a lower LTV repayment mortgage - which means lower interest rates and more competitive terms.

Illustration:

  • You purchased a home on an interest-only mortgage for £400,000, with a loan of £300,000 - therefore, you own £100,000 equity and need a 75% LTV remortgage.
  • However, if that property is now worth £500,000, and you owe the same £300,000, then your equity is £200,000, so you'd need a remortgage at 60% Loan to Value.

How Does Switching to a Repayment Mortgage Impact my Affordability?

When changing from interest-only to repayment mortgage lending, your monthly payments will probably increase.

Lenders will look at affordability from a similar perspective whichever loan type you are applying for.

Therefore, if you have an interest-only mortgage that you have had for a few years unless your circumstances have significantly changed, you should be able to secure repayment lending for a similar value.

What is the Maximum Repayment Mortgage I Can Get when Remortgaging?

Most lenders will take your average annual income, and multiply that by four or 4.5 times to arrive at a maximum they will lend.

Specialist lenders can lend as high as six times your income, although this is usually only available when negotiated through an experienced broker.

In some cases, the affordability calculation will differ. For example, some lenders will include any bonuses, commissions or overtime in the maximum mortgage calculation. Others will not include anything but a basic salary, or will only include 50% of that income.

Illustration:

  • You earn £30,000 salary, plus £15,000 bonus per annum.
  • Lender A includes 50% of bonus income and lends up to 4% of annual earnings. They offer a maximum mortgage of £150,000.
  • Lender B includes 100% of bonus income and lends up to 5% of annual earnings. They offer a maximum mortgage of £225,000.

We can see from this example that it is crucial to consult a broker to apply to the right lender, as this can dramatically impact the mortgage value offered.

Is it Possible to Switch to a Repayment Mortgage in New Employment?

Yes, if you're in a new job, you can remortgage from an interest-only loan.

This depends on your probation period, how much experience you have, and the stability of your contract.

Mainstream lenders will often need at least one year of employment history, but a niche lender can offer greater flexibility. Contact mortgage brokers on 0330 304 3040 if you're interested in switching your mortgage, and do not have a long employment history in your current role.

Is it Possible to Remortgage from Interest-Only to Repayment as a Self-Employed Person?

It is, and with a growing number of lenders accepting self-employed applicants, if you have at least one year of trading history, you should be able to remortgage.

Calculations and criteria will vary between lenders, so some will consider your income and dividends when calculating the maximum mortgage value they can offer. Other lenders will include retained profits left in the business as well, with still others including benefits in kind.

Can I Switch to a Repayment Mortgage as a Contractor?

As with self-employed applicants, a remortgage is possible, but using an expert broker is essential to ensure you apply to the appropriate lender.

Contractor mortgages will use your day rate to calculate the maximum loan, usually incorporating eight weeks leave as a standard indication of your average annual income.

Illustration:

  • Your day rate is £500, and a lender calculates this as £2,500 per week or £115,000 as a projected annual income.

Revolution works with specialist CIS lenders with experience in the contractor sector, so if you are looking to remortgage in this scenario and have been turned down by a high-street lender, get in touch on 0330 304 3040.

Does my Other Borrowing Impact my Remortgage from Interest-Only?

If you have taken out increased levels of debt since your original interest-only mortgage, these liabilities will be considered in a quote for a repayment remortgage.

Unsecured credit debt will reduce the maximum you can borrow, as this sort of expense is offset against your annual income in the affordability calculations.

Illustration:

  • You earn £40,000 a year but owe £400 per month in credit card repayments.
  • The lender calculates your annual obligation as £4,800.
  • Maximum mortgage value is calculated against the net yearly income of £35,200.
  • Say the lender offers up to five times annual income, the maximum mortgage value is £132,000.

In this same scenario, if you repaid your credit card debt, and had no monthly obligation, the lender could offer borrowing of up to £200,000.

Is There a Maximum Age for an Interest-Only Remortgage?

It depends on the lender. Some mainstream providers have maximum applicant age caps of 75 or 85. Others have no cap at all.

The key is to apply to the right lender, with independent advice from a broker, and to ensure you can meet the minimum affordability criteria.

Can I Remortgage an Interest-Only Mortgage to Bring Forward the End Date?

You can - if you reduce the length of the mortgage term, your monthly payments will increase, but the debt will be repaid sooner.

A popular option in this scenario is to use a part and part mortgage to split the difference, paying back the loan quicker, but without such a high monthly cost.

Can I Remortgage to a Repayment Product if I Have Adverse Credit?

Potentially, but with any adverse credit issues, it is always advisable to work with an experienced broker who can recommend specialist bad credit lenders.

Can I Check my Credit Report before Remortgaging?

You certainly can, and it's a good idea to register with Equifax, Experian or another credit rating bureau to review your credit history before applying for a remortgage product.

This enables you to query any inaccuracies, understand your credit file, and answer any queries raised by your lender.

Expert Guidance in Interest-Only Remortgage Applications

For independent support from a whole of market broker, contact Revolution on 0330 304 3040 or email us at [email protected].

Our team can recommend the best lenders for an interest-only to repayment mortgage switch, as well as advice about how to secure the most competitive borrowing rates.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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