Why Switch from Interest-Only to Repayment?
With an interest-only mortgage, your monthly payments only cover the interest — you're not reducing the capital owed. At the end of the term, you'll still owe the full amount you originally borrowed. Many borrowers who took out interest-only deals in the past are now approaching a point where they need to address the capital repayment.
Switching to a repayment mortgage means your monthly payments include both interest and capital, so your balance gradually decreases to zero by the end of the term. While this increases your monthly outgoings, it provides certainty that your mortgage will be fully paid off.
How the Switch Affects Your Monthly Payments
The increase in monthly payments can be substantial, depending on your remaining term and balance. For example, on a £200,000 mortgage at 5%:
- Interest-only payment: Approximately £833 per month
- Repayment over 20 years: Approximately £1,320 per month
- Repayment over 25 years: Approximately £1,169 per month
The difference between interest-only and repayment can be £300 to £500 or more per month. However, the repayment option ensures you actually own your home outright at the end of the term, rather than facing a large debt with no plan to pay it off.
Options for Making the Switch
You have several ways to switch from interest-only to repayment:
- Product transfer: Ask your current lender to change your mortgage from interest-only to repayment. This is often the simplest route and may not require a full affordability assessment.
- Remortgage to a new lender: Switch to a new lender on a repayment basis. This gives you access to the wider market and potentially better rates, but involves a full application process.
- Part-and-part: Some lenders offer a hybrid where part of the mortgage is on repayment and part remains interest-only. This reduces the payment increase while ensuring at least some capital is being repaid.
Dealing with Affordability Concerns
If the jump from interest-only to full repayment is too large for your budget, there are strategies to manage the transition. Extending the mortgage term reduces the monthly payment, though you'll pay more interest overall. A part-and-part arrangement lets you switch gradually. Making regular overpayments on an interest-only mortgage also chips away at the capital without formally switching to repayment.
If you're approaching retirement and still on interest-only, the situation is more urgent. Speak to a mortgage broker about your options. Some lenders have specific products designed for borrowers transitioning from interest-only, including retirement interest-only (RIO) mortgages that allow older borrowers to pay interest indefinitely with the capital repaid when the property is eventually sold.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.