A Friendly Guide from Mortgage Bridge to Help You Make the Switch
What Is an Interest-Only Mortgage and Why Might You Want to Switch?
If you took out an interest-only mortgage, you were probably drawn in by the lower monthly payments. But now, you might be wondering if it’s time to switch to a repayment mortgage. How do you switch from an interest-only to a repayment mortgage? You’re in the right place! We’ll walk you through why making the switch could be a smart move, how to go about it, and what to watch out for.
Why Should You Switch to a Repayment Mortgage?
1. Will Switching Help You Build Equity in Your Home?
Yes! If you’re still on an interest-only mortgage, your payments are only covering the interest – not reducing what you actually owe. That means you’re not building any equity. What are the benefits of switching to a repayment mortgage? A repayment mortgage gradually reduces your loan balance over time, meaning you own more of your home with every payment.
2. What Happens When Your Interest-Only Mortgage Term Ends?
If your interest-only term is coming to an end, you might be wondering “What do I do now?” Unless you have a solid plan in place to pay off the full loan balance, you could be in for a financial shock. How can you avoid a big lump sum payment at the end? Switching to a repayment mortgage ensures you’re paying off your loan bit by bit.
3. Will Switching Save You Money in the Long Run?
It’s easy to focus on the lower monthly payments of an interest-only mortgage, but in the long run, you could end up paying much more in interest. How much will your payments go up if you switch? That depends on your loan balance and interest rate, but one thing is certain – a repayment mortgage reduces the amount of interest you pay over time.
4. Should You Switch If Interest Rates Are Rising?
Interest rates always fluctuate, so you might be asking “Is now a good time to switch?” The sooner you start paying down your loan balance, the better positioned you’ll be if rates increase. What impact will switching have on your mortgage flexibility? Moving to a repayment mortgage now could give you more options in the future.
How Do You Switch to a Repayment Mortgage?
1. Where Do You Start?
First things first – talk to your lender! Can you switch directly with your lender? Many lenders will let you switch to a repayment mortgage without too much hassle. If they don’t offer great terms, it might be worth shopping around for a better deal.
2. Will You Need to Pass an Affordability Check?
Before making the switch, your lender will likely check if you can afford the new payments. What do lenders look for when switching mortgages? They want to ensure you can manage the higher payments comfortably. Taking a look at your budget beforehand can help you prepare.
3. What Are the Costs of Switching?
Switching sounds great, but what fees should you expect? Here are some potential costs to keep in mind:
- Higher monthly payments
- Arrangement or admin fees
- Possible early repayment charges
If you’re remortgaging from an interest-only to a repayment mortgage, comparing different lenders can help you find the best deal.
4. What If You Can’t Switch Right Away?
If switching isn’t an option right now, don’t worry. What alternatives do you have if switching isn’t possible? Here are some options:
- Part-and-Part Mortgages: A mix of interest-only and repayment, allowing you to start reducing the loan balance gradually.
- Overpayments: Some lenders let you pay extra on your interest-only mortgage, reducing the principal over time.
5. How Can You Find the Best Mortgage Deal?
How do you compare mortgage deals effectively? Shopping around! Mortgage brokers (like us at Mortgage Bridge) can help you compare options and find a repayment mortgage that suits your budget.
6. Do You Need a Property Valuation?
If you’re switching, your lender may want to check the value of your home. Will a new property valuation be required? Not always, but it’s something to check with your lender.
What Are the Benefits of Switching to a Repayment Mortgage?
1. How Does Switching Help You Own More of Your Home?
With a repayment mortgage, every payment reduces the amount you owe. What’s the long-term benefit of switching? Over time, you’ll own more of your home and be in a stronger financial position.
2. Will You Pay Less Interest Over Time?
How does switching lower your mortgage costs? Unlike interest-only mortgages, where you only pay interest, repayment mortgages gradually reduce your balance, meaning you pay less interest in the long run.
3. Will Switching Give You More Mortgage Options in the Future?
Having a repayment mortgage makes you less of a risk to lenders. Will switching improve your chances of remortgaging? Yes! You’ll likely have more options when it comes to remortgaging in the future.
4. Does Switching Give You Peace of Mind?
Knowing you’re making progress on paying off your mortgage can take a huge weight off your shoulders. Is switching worth it for peace of mind? Yes, because you won’t have to worry about a big lump sum at the end of your term!
Things to Consider Before Making the Switch
1. Can You Afford the Higher Payments?
Your monthly payments will go up, so how can you budget for the increase? Checking your expenses and making a plan can help you stay on track.
2. Are There Any Fees for Switching?
Some lenders may charge fees for switching. What costs should you watch out for? Check if your current mortgage has early repayment charges and make sure the benefits outweigh the costs.
3. Will This Affect Your Other Financial Goals?
Higher mortgage payments might mean less flexibility for other financial commitments. How can switching fit into your overall financial plan? It’s worth considering your long-term goals.
What If You Can’t Switch Right Now?
If switching isn’t an option yet, here are some things you can do:
- Make Overpayments: If your lender allows it, overpaying on your interest-only mortgage can reduce the balance over time.
- Set Up a Savings Plan: If you’re staying on an interest-only mortgage, make sure you have a plan to pay off the balance at the end.
- Extend Your Term: Some lenders allow you to extend your mortgage term to make payments more manageable.
Final Thoughts – Is It Time to Switch?
Switching from an interest-only mortgage to a repayment mortgage is a big step, but it’s one that can give you financial security and peace of mind. Should you make the switch now? Assess your finances, explore your options, and speak to a mortgage expert.
At Mortgage Bridge, we help people just like you make smart mortgage decisions. How can we help you switch? If you’re ready to explore your options, get in touch – we’d love to help!