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 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 (if you’re unprepared, that is…).
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. This shift would allow you to drop the capital repayment and cover only the interest.
However, they will most likely want to do some checks to make sure you’ll be able to catch up with the payments later. Plus, they’ll set limits on how long the switch period is going to last.
Yet, it’s not unheard of for a lender to deny the requests altogether, even if the homeowners have good credit scores and have never been behind on their mortgage repayments.
So, it all depends on how flexible the lender is when it comes to reaching new agreements to help borrowers going through hardships.
How the Government Measures Could Help Secure an Approval
The good news is there’s also a government-backed initiative that urges banks and building societies to give homeowners the option to make short-term changes to their mortgage products as a relief measure from the high rates we’re all experiencing across the UK right now.
While this approach comes with some credit-related perks, there are duration limits to consider. We’ll get to that in a minute!
Why Switch to a Temporary Interest-Only Mortgage Repayment?
Generally speaking, borrowers might look into a temporary switch to interest-only payments when they need to cut expenses temporarily.
Here are a few scenarios where the short-term swap could come in handy:
1. You’re Going Through A Rough Patch
A temporary interest-only plan can be a lifeline for financially vulnerable households. Considering the soaring mortgage rates on the market these days, this scenario is highly likely.
The general idea here is that the switch can help you bring down monthly expenses until you’re back on your feet.
2. You’re Taking Time Off Work For A While
Maybe you’ll be taking time off and won’t be able to handle the same payment you’ve been covering for a while. This scenario would also be a reason to switch, as long as you can prove to your lender that you’ll get back to work on the same (or better) salary soon.
For instance, some borrowers could consider the switch if they have lost their jobs and are still looking for new, steady employment to cover the mortgage.
Other people taking maternity leave could opt to pay interest only since their household expenses go up suddenly, and they want to have more spending money each month.
Once they get back to work, they can shift back to their old mortgage deal and make their repayments on time.
3. You’ll Need To Refinance Soon
If you’re one of the million or so homeowners with fixed-rate deals coming to an end soon, switching to an interest-only repayment could save you from having to refinance at much higher rates.
A planned guideline by the FCA could help you make this switch even if you haven’t reached an agreement on the repayment strategy with your lender yet. However, if you want to make the switch permanent, you’ll need to have a solid repayment plan in place.
What to Consider Before Switching to Interest-Only Mortgage Temporarily
Regardless of the reason, the switch isn’t to be taken lightly. Sure, it could save you from payment shortfalls, but it might also make your financial situation worse over time.
Here are a couple of things to keep in mind when you’re evaluating whether making a short-term change to your repayment type is the right move for you:
The Mortgage Change Duration
Before you apply for the temporary interest-only loan, ask yourself how long you need this short breather to be. You might be able to get the switch request approved for 12 or even 24 months, but each case is different. And not everybody will need an interest-only mortgage for this long.
It’s also important to note that the government-backed mortgage change we talked about earlier is only good for up to six months.
If you don’t think your financial situation will improve soon enough, look into other mortgage relief alternatives.
Your Future Repayment Plan After Switching Back
The total interest bill will likely go up substantially if you make the switch—yes, even if it’s only temporary.
With regular interest-only plans, the homeowner could cover the borrowed amount with savings, investments, or even selling the property at the end of the term. Similarly, you need to consider how you’ll cover the amount you owe over time and discuss your options with your lender.
For instance, you could choose to make overpayments when the temporary switch duration is over. Of course, these overpayments won’t increase your equity at all, and they’ll just go to cancel any extra debt that accumulated while you were paying interest only.
In other cases, you might be able to extend your mortgage term to make up for the breathing period. The longer mortgage term would mean lower monthly repayments, even with your interest-only mortgage break.
Alternatively, you could plan to sell assets later and use the profits to cover the outstanding debt.
Either way, you’ll probably need to show your existing lender that if they give you some leeway now, you’ll be able to pay them back later.
Alternative Solutions to the Temporary Interest-Only Switch
If switching to an interest-only fix for a few months is off the table, consider other options. For instance, you could go for payment deferrals, hybrid mortgages, or even a remortgage deal.
Unfortunately, each one has its limitations and downsides. Let’s take a look at the details to help you decide:
1. Applying for a Mortgage Payment Holiday
At its core, a payment holiday means freezing your payments for up to a whole year. This way, you won’t pay anything for a while, not even the interest. However, it’s still a deferral, so you’ll have to pay everything back later.
Plus, you’ll want to provide proof (bank statements, for instance) of your financial difficulty since lenders tend to reserve the holidays for those who need it the most.
Some lenders also limit the holidays for those who owe less than 75% or 80% of the current home value.
Overall, the main drawbacks to consider include:
- Your credit report will show all the missing payments.
- Much like the temporary switch, you’ll need to do overpayments or extend the mortgage duration to catch up.
- You might have to pay more interest in the long term.
- The property needs to be your residence and not a house you let out.
- Lenders might not approve the request if you’re receiving support from the Department of Work and Pensions.
- Taking the holiday could limit your remortgaging options later on.
- You probably won’t be eligible if you’ve had a recent mortgage payment holiday.
Note that payment deferrals during the Covid-19 pandemic might not count when the lender is looking back at your recent holiday applications. That’s good news when you consider that more than 1.2 million payment holidays were offered to homeowners affected by the pandemic.
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 don’t approve a switch to interest-only mortgages because they find it too risky, but they might consider a part-and-part plan instead.
Part-and-part mortgages 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 won’t reduce your monthly expenses as much as switching to a true interest-only mortgage. However, it still could help you push through the rough financial patch.
The main perk here is that it’s generally easier to get this switch approved. Needless to mention, the part-and-part mortgage product could come in handy if you can’t afford to pay a huge lump sum at the end of your term.
3. Extending Your Mortgage Term
Another alternative solution is to ask for an extension on your 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 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 mortgage terms with your 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.
Why not opt for an interest-only mortgage from the get-go?
Some borrowers avoid interest-only plans because they don’t want to shoulder higher rates or don’t like the idea of having to pay a lump sum at the end of the term.
Will switching to an interest-only mortgage temporarily affect my credit score?
No, not necessarily. 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.
Is there a limit for the overpayments?
Yes, 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.
Can I change my mortgage to interest-only for two years?
It might be possible to get a two-year switch, but not all lenders will be this flexible with their repayment type change policies. With support from our team, you may be able to remortgage on an interest-only deal for two years if your circumstances require it.
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.
Is switching to interest-only challenging?
Lenders usually consider interest-only mortgages risky. However, it’s still possible to make the switch, especially if you consult an advisor and set a credible repayment plan.
Switching To Interest-Only Mortgage Temporarily Summary
So, can you switch to an interest-only mortgage for a short period? In a nutshell, yes.
However, it’s still 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 term extension to bring down your mortgage payments again.
Does this mean you’re better off without the temporary mortgage repayment type change?
Well, it’s 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 financial situation.
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.