Some borrowers favour traditional repayment deals over interest-only. However, there might come a time when their income drops. In that case, they’ll desperately want to lower the monthly payments. Switching to an interest-only mortgage temporarily could seem like a tempting offer, but is it even doable?
The short answer is yes. It’s possible to change the mortgage type for a while, but there are some requirements, time limits, and financial implications to consider. Below, we’ll walk you through all the details you need to know before making a potentially risky switch.
How and when do lenders allow temporary switches to interest-only mortgages?
Many lenders will approve a temporary change from a regular (capital and interest) repayment plan to an interest-only one, deducting capital repayments and covering only the interest. Of course, this also means that your overall capital will not drop, and your outstanding mortgage balance will not change throughout the term.
Why switch to a temporary interest-only mortgage repayment?
The main advantage of switching to an interest-only mortgage is that it reduces your monthly outgoings by a considerable amount. But mortgage lenders will not allow the change on a whim, meaning you need a good reason backed with evidence.
Some of the following situations are viable reasons:
- Drastic financial situation change – A temporary interest-only plan when your circumstances change. This is called forbearance, or hardship, and it drops your immediate monthly outgoings to help you regain stability.
- Time off work – One of the biggest factors mortgage lenders consider is income, and if your income will be dropping for some time, monthly repayments will be harder to make. Lenders would prefer this doesn’t happen, as they will lose out if you don’t reduce the overall outstanding balance.
- You’ll need to refinance soon – If you have a fixed-rate deal that’s coming to an end, your current interest rates will end and almost certainly go up. Lenders prefer you to remortgage, but will consider a temporary switch to interest-only payments if it helps your repayment strategy.
What if mortgage lenders refuse?
If mortgage lenders refuse, there is another option – although it’s intended for emergency use only. The Mortgage Charter is a piece of legislation introduced by the UK government and major lenders in 2023 to help prevent financial distress. It allows homeowners to switch to interest-only repayments for six months without a full affordability check. This only applies when:
- You have a residential mortgage – Buy-to-let mortgages do not qualify.
- You are not in arrears – If you are in arrears, the Charter mandates that full hardship checks must be carried out by the lender.
- Your lender is Mortgage Charter certified – The Mortgage Charter is voluntary, and some have refused. That being said, 85% of the mortgage market has signed up due to the enhanced reputation they offer.
- No exceptional circumstances apply – Such as evidence of mortgage fraud and serious concerns of future viability.
- No recent mortgage change has occurred – You haven’t used forbearance or restructured your mortgage recently.
An interest-only deal through this method can be done up to six months.
What do I need to know about a switch to interest-only mortgages?
Making the switch to interest-only payments is not guaranteed, nor is it an all-encompassing solution. Consider the following:
- The mortgage change duration – Your temporary interest-only mortgage term length will need to scale with your reasons for taking it. This means you will need a solid repayment plan backing your request.
- Higher expense when changing back – Your future repayment plan will look very different once you switch back to a capital repayment mortgage. The remaining mortgage term will be shorter, meaning monthly repayments will be higher, which is a bigger issue the longer the interest-only mortgage is. Alternatively, you could remortgage and extend your mortgage term, but this will result in a higher total interest bill on top of the interest-only repayments.
Alternative solutions to the temporary interest-only switch
If you cannot switch to interest-only repayments out of a need for financial relief, you can consider the following options instead:
1. Apply for a mortgage payment holiday
At its core, a mortgage holiday means freezing your payments for up to a whole year.
Since this is a hardship solution, many lenders reserve mortgage holidays only for those who need it, and you’ll need to prove it via financial documentation. Some lenders also limit the holidays for those who owe less than 75% or 80% of the current property value.
Still, we’d recommend contacting your lender and asking about the requirements for a mortgage payment holiday to see if you fit the criteria, especially if you’re having a difficult time right now and feel a mortgage payment holiday could help get you back on track.
2. Switching to a part-and-part product
In some cases, lenders who don’t approve a switch to interest-only mortgages may provide a counter-offer of a part-and-part plan instead. These are a hybrid between interest-only and traditional repayment products. They let you cover some of the capital amount and pay reduced monthly payments for the rest.
The hybrid repayment plan will still allow lower monthly repayments, as well as chip away at the outstanding balance. It’s generally easier to get this type of switch approved than an interest-only mortgage. Needless to say, the part-and-part mortgage product could come in handy if you want to avoid paying a huge lump sum at the end of your term.
3. Extending your mortgage term
You’ll have a longer period to repay your balance, and it will still bring down the monthly payments a bit.
That said, it’s important to keep in mind that most lenders usually set age limits when they’re evaluating borrowers. The same principle could apply to people with existing mortgages applying for an extension.
So, if you’re close to that limit, you might not be eligible for an extension. If you’re a pensioner, it’s better to consult a specialised mortgage advisor to figure out if this is a valid option for you. When The Bank Says No’s team of expert advisors are on hand to help if you need any advice and support whilst negotiating better mortgage terms with the right lender.
4. Remortgaging with a new lender
Suppose your lender doesn’t offer short-term repayment changes, or you’re not eligible for the available switches. In cases like this, you could consider remortgaging to an interest-only product from a different lender.
That might be tricky, but an advisor or broker could help figure out what (if any) remortgaging options you have and how they compare to your current deal. Trust us to help today.
Then, when you’re back on your feet, you could contact the new lender and ask them to switch you to a repayment mortgage to start reducing the amount you owe them. Generally speaking, doing this should be easier than switching from capital repayment to interest-only permanently.
Conclusion
While you can switch from a capital repayment mortgage to an interest-only mortgage for a short period, it can still be a risky move. Once the switch duration is over, you’ll owe the lender more money that needs to be covered in a shorter period. You’ll need to put up with higher monthly payments or ask for a mortgage term extension to bring down your monthly mortgage payments again.
Does this mean you’re better off without the temporary mortgage repayment type change? Well, the answer is not black and white. The switch could save you money or hurt you in the long term, and it all depends on your current mortgage deal and the extent of your current financial difficulties.
Not sure if switching to an interest-only plan is the right move for you? Get in touch with the team at When The Bank Says No today for more information.
FAQ – Why not opt for an interest-only mortgage from the get-go?
There are several reasons why an interest-only mortgage is considered only in specific situations:
- Repayment plan – You need a strong repayment plan before most lenders will even consider it, and such plans usually don’t require interest-only mortgages immediately.
- More interest – So long as you’re not paying off both capital and interest, you will be dealing with a higher interest amount.
- Higher risk – Post-2008, the FCA have claimed that interest-only mortgages are a major financial risk, and lenders tightened criteria heavily.
Some borrowers avoid interest-only plans because they don’t want to shoulder a higher interest rate or don’t like the idea of having to pay a lump sum or the remaining mortgage balance at the end of the term.
FAQ – Will switching to an interest-only mortgage temporarily affect my credit report?
No, so long as the switch is not treated as formal arrears or a default.
Furthermore, if you go for the government-backed six-month switch, your credit score won’t be affected. You might not even need to go through any additional affordability checks in this case.
FAQ – Is there a limit for the overpayments?
Yes, mortgage lenders might limit your overpayments to 10% before you have to shoulder penalties or extra charges. Make sure to ask before you make the short-term mortgage switch so you can be prepared for your repayment plan in the future months when you switch back.
FAQ – Can I change my mortgage to interest-only for two years?
It might be possible to get a two-year switch, but not every mortgage lender will be this flexible with their repayment type change policies. With support from our mortgage broker team, you may be able to remortgage with a specialist lender on an interest-only deal for two years if your circumstances require it.
FAQ – What are the drawbacks of switching to interest-only temporarily?
All in all, the main drawbacks and risks that come with changing to interest-only mortgage plans for a while are:
- You won’t build any equity for the duration of the switch.
- You’re only deferring the capital payments and have to figure out a way to cover them later.
- You might still face repossession after the switching period is over if you can’t catch up with the outstanding debt.
- You could find yourself in negative equity if house prices fall during the period of interest-only.
FAQ – Is switching to interest-only repayments challenging?
Lenders usually consider interest-only mortgages risky compared to repayment mortgages. However, it’s still possible to make the switch, especially if you consult an advisor and set up a solid repayment strategy.