Switching from Interest-Only to Repayment Mortgage
If you currently have an interest-only mortgage, you might be considering switching to a repayment mortgage.
The prospect of fully repaying your mortgage by the end of its term can provide significant peace of mind.
However, transitioning from an interest-only to a repayment mortgage involves careful consideration. Here we explain the process, explain the key differences between mortgage types, and the benefits of seeking professional advice from Kerr & Watson.
Understanding the Difference: Interest-Only vs. Repayment Mortgages
Before addressing the steps for switching your mortgage, it’s essential to understand the differences between an interest-only mortgage and a repayment mortgage.
Interest-Only Mortgage:
- Monthly Payments: Cover only the interest, meaning the loan amount (capital) remains unchanged throughout the term until the date you pay it back.
- Repayment: You need a separate plan to repay the mortgage at the end of the term, such as savings, investments, or selling your property.
- Risk: Without a solid repayment strategy, you risk not having enough funds to clear the mortgage balance, potentially leading to the sale of your property and having to move into a property that is unsuitable or in a cheaper area.
Repayment Mortgage:
- Monthly Payments: Cover both the interest and a portion of the capital, gradually reducing the loan balance.
- Repayment: By the end of the mortgage term, the entire debt is repaid, providing you with full ownership of your property.
- Peace of Mind: This option offers more security, as you know the mortgage will be cleared within the agreed term.
- Switching to a repayment mortgage means higher monthly payments, but it also means you’re steadily working toward full ownership of your home.
Why Consider Switching to a Repayment Mortgage?
Several reasons might prompt you to switch from an interest-only mortgage to a repayment mortgage:
- Peace of Mind: Knowing that your mortgage will be fully repaid at the end of its term can alleviate financial stress.
- Financial Changes: An increase in income or the end of other financial commitments may make higher monthly payments more affordable.
- Avoiding Shortfalls: If your current repayment strategy (such as investments or savings) is unlikely to cover the mortgage balance, switching to repayment can prevent future financial difficulties.
It is not always suitable for someone to come off interest only due to the higher monthly payments. Therefore, you should take professional advice before making any changes.
Find out Your Options
Steps to Change from Interest-Only to Repayment Mortgage
Changing your mortgage type involves several key steps. Here’s a breakdown of what you need to do:
1. Review Your Financial Situation
Start by assessing your current financial situation. Can you afford the higher monthly payments that come with a repayment mortgage? Consider your income, expenses, and any other debts you may have. This self-assessment is crucial in determining whether a repayment mortgage is sustainable for you. Speak with a mortgage adviser to get professional advice.
2. Speak with Your Lender
You may want to speak with your current lender. They can provide specific details on the process of switching your mortgage. Some lenders may require you to pass an affordability assessment or pay fees to make the switch. It’s essential to understand these requirements before proceeding.
3. Explore Remortgaging Options
If your current lender cannot accommodate your switch or if their terms are not favourable, remortgaging with a new lender could be a viable option. Remortgaging involves taking out a new mortgage with a different lender, potentially at a more competitive rate. Keep in mind that remortgaging may involve additional costs, such as early repayment charges and legal fees. If you are planning to do this, you should speak with a qualified mortgage adviser for professional advice.
The Role of a Mortgage Broker
A mortgage broker plays a vital role in helping you switch from an interest-only to a repayment mortgage. Here’s how Kerr & Watson can assist you:
- Market Comparison: We compare mortgage deals across the market and your current lender, ensuring you find the best terms available.
- Tailored Advice: Our advisors consider your unique financial situation and future goals to recommend the most suitable mortgage type.
- Cost-Effective Solutions: By leveraging our industry expertise, we help you avoid unnecessary costs and secure a mortgage that aligns with your financial capabilities.
Common Concerns and Solutions
What if My Current Lender Doesn’t Allow the Switch?
If your lender doesn’t permit the switch to a repayment mortgage, or their terms are unfavourable, remortgaging with a new lender may be an alternative if you meet criteria. It’s essential to compare the costs and benefits of staying with your current lender versus switching to a new one. A mortgage broker can assist in finding the best option.
What About Early Repayment Charges?
If you’re within a fixed-rate period, your current lender may charge an early repayment fee if you switch mortgages. However, the long-term savings and security of a repayment mortgage may outweigh these initial costs. It’s important to factor in these charges when deciding to switch and to take professional advice.
Conclusion
Switching from an interest-only to a repayment mortgage is a significant financial decision that requires careful consideration.
At Kerr & Watson, we understand that every homeowner’s situation is unique. Our team of experienced mortgage advisors is here to help you, ensuring you make an informed decision that benefits your financial future.
