Options for Switching Your Mortgage to Interest-Only
Could switching your repayment mortgage to an interest-only product be a good move? If you're looking to reduce your monthly outgoings, this mortgage swap could be a cash flow lifeline - here; we'll explain how it works and what you should know before making a decision.
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Based on your yearly income,
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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.
Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.
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.
Options for Switching Your Mortgage to Interest-Only
There are lots of scenarios when switching to an interest-only mortgage might be advantageous - and with lots of lenders and criteria to consider, it can be tricky to work out the best way to go about it.
In this article, the Revolution team explores switching and remortgaging options and what factors a lender will consider.
For support with remortgaging your lending to an interest-only product, give the team a call on 0330 304 3040, or drop us an email to [email protected].
How are Interest-Only and Repayment Mortgages Different?
Repayment mortgages involve making a monthly payment of an element of interest and capital. This means you gradually repay the loan over several years.
Interest-only mortgages mean only paying the interest element each month, and therefore needing to repay the original amount borrowed at the end of the term.
A middle ground is to consider a part and part mortgage, which offers an element of both interest-only and repayment.
To secure interest-only lending, you need a repayment vehicle to demonstrate how you will make that repayment. However, the benefit is that the monthly costs are significantly lower.
It is essential to consider that the overall repayment on an interest-only mortgage will be higher than on a capital loan.
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How Can I Check if I am Eligible for an Interest-Only Mortgage?
The most significant factor is your repayment strategy, and the strength of this will determine your eligibility along with other factors.
You might be borrowing to purchase an investment property, and plan to sell it at the end of the term, or perhaps plan to reduce your monthly expenses by using an interest-only mortgage, with the plan to sell your home and downsize.
For help assessing the viability of your repayment vehicle, give us a call on 0330 304 3040.
Can I Switch to an Interest-Only Mortgage Any Time?
It depends. If you have a fixed period on your mortgage or haven't been with the provider long, you might incur early repayment penalties for remortgaging outside of the terms of your agreement.
You should always take the time to read through the documents and see what charges might be incurred by switching.
Is it Possible to Change Temporarily to an Interest-Only Mortgage?
This is a common question when homeowners fall into financial difficulties, and want to reduce their mortgage payments short-term until they find a new job, or until the situation stabilises.
Some lenders can offer temporary product switches - but in this scenario, it is essential to seek advice from an independent broker who can provide recommendations about the best options.
Is there a Minimum Equity Requirement to Remortgage to an Interest-Only Product?
The equity held is an important factor, because while many repayment mortgages offer up to 95% Loan to Value, interest-only loans are typically capped at 75%.
However, even with a small amount of equity, you can remortgage, and there are plenty of options to explore.
One example is to use a part and part mortgage, in which case the proportion of the debt eligible for an interest-only loan is linked to the equity, with the balance on a repayment basis.
- You have a property worth £500,000 with a mortgage of £400,000 - and therefore equity of 20%.
- You want to switch to an interest-only mortgage, but the lending cap is 75% LTV.
- The lender offers an interest-only mortgage on £375,000 (75% Loan to Value) with the repayment element for the residual £25,000.
What Practical Factors Impact my Ability to Switch to an Interest-Only Mortgage?
The big positive is that an interest-only mortgage is cheaper each month. However, a lender will need to carry out affordability assessments similar to those for a repayment mortgage application.
Interest-only is not a method to extend the maximum you can borrow.
Lenders will consider your circumstances, and the finances involved, so the best option is to contact a whole-of-market broker who can take a view as to the best products for you, and whether an interest-only mortgage is an optimal solution.
What is the Maximum I Can Borrow on an Interest-Only Mortgage?
Most lenders use a multiple of your annual income to arrive at the maximum they will lend. The standard is four, or 4.5 times your payment, while specialist lenders can offer up to six times your salary.
You can also find lenders who offer flexibility in considering bonuses and commissions in your annual income calculation to be able to provide a higher mortgage maximum.
- You earn £30,000 per year plus a bonus of £20,000.
- Lender A offers up to four times annual income and includes 50% of your bonus. They offer a maximum mortgage of £160,000.
- Lender B offers up to five times annual income and includes 100% of your bonus. They offer a maximum mortgage of £250,000.
The example shows why it is so essential to consult an experienced broker before making an application - because different lenders can offer very different mortgages, depending on their policies.
Can I Switch to an Interest-Only Mortgage in a New Job?
Potentially yes. While mainstream lenders often require a minimum of one year of employment, niche providers offer interest-only mortgages even if you have only just started a new position.
Other lenders can offer mortgages if you are not currently employed, but are due to take up a role within the next three months.
Can I Remortgage to Interest-Only as a Self-Employed Applicant?
Mainstream lenders usually need three years worth of accounts or tax returns to consider a self-employed applicant. However, as the self-employed market grows, more lenders are offering more flexible products, with some needing just one-year worth of trading history.
Specialist lenders can also consider applicants with even less history, depending on your professional experience.
This is another scenario when lender policies make a big difference in how much you can borrow - some will only consider your salary and dividends when calculating a maximum mortgage. In contrast, others will include all business profits, including those retained in the company.
- You own a limited company as a 50% owner and receive a £10,000 salary and £40,000 in dividends at year-end. The business makes a net profit of £200,000.
- Lender A lends up to five times annual income and only considers your salary and dividends. They offer a maximum mortgage of £250,000.
- Lender B lends up to four times annual income, but is a self-employed specialist and will include your 50% share of the business net profits in their calculations. They offer a maximum mortgage of £400,000.
Can Contractors Change to an Interest-Only Mortgage?
Contractors can find it challenging to secure interest-only mortgage lending due to the variable nature of their work. However, niche lenders offer specific products, with mortgage maximums based on a calculation of your day rate.
This calculation assumes you work five days per week, and 46 weeks per year to account for potential holidays and illness absences.
For example, if your day rate is £600, a lender will calculate a weekly average income of £3,000, and an annual income of £138,000 to use in their lending assessments.
Can I Remortgage to an Interest-Only Loan on Maternity Leave?
It depends on the lender, as some will be happy to remortgage provided you have the income to meet the interest payments. The repayment vehicle must also be viable.
However, being on maternity leave can change your income significantly, so a lender might ask for documentation confirming your intent to return to work, as well as financial budgets to demonstrate affordability.
You can also find speciality products for workers on maternity leave - contact mortgage brokers on 0330 304 3040 for more information.
Can I Get an Interest-Only Mortgage Switch with Bad Credit?
You can, depending on what the issues were, and when they occurred.
High street lenders often struggle to lend to bad credit applicants, but specialist bad credit lenders offer a range of mortgage options to help resolve your financial difficulties.
Providers will look at what credit problems occurred, how long ago, what values were involved, and whether the matter is now settled. If you provide context that demonstrates that the issues are unlikely to recur, this can be useful.
Professional Advice with Switching to an Interest-Only Mortgage
There are multiple factors to consider when remortgaging, and when choosing an interest-only mortgage, it is essential to understand all the pros and cons, as well as the costs involved.
For independent advice from a whole-of-market broker, contact the Revolution team on 0330 304 3040, or send us a message to [email protected].
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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.
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