Changing Mortgage Repayment Method

22 Oct 2007

Most mortgage lenders allow a borrower to change between interest-only and repayment methods at any point during an exiting policy. For example, if you have an existing mortgage policy that is interest-only, you can change it to repayment and visa versa.

The actual process of switching is pretty straightforward; it’s not like completely remortgaging. You’ll still keep your existing policy (same rates), however, your monthly payments will change.

You should check your terms and conditions or contact your lender’s customer service department just to clarify that you’re with in your rights to change the repayment method. But as I said, it shouldn’t be a problem; most lenders will accommodate the requested change.

Here’s a small extract from Northern Rock’s terms and conditions. You should be looking for a clause which allows you to “change of repayment method”, as highlighted in red:

As you can see, there is a small £75 admin fee. The admin fee may vary depending on your lender.

Difference between Interest-only and repayment:
Here’s an article on the differences between Interest-Only Vs Repayment Mortgages, including the advantages and disadvantages of each.

Why switch from Interest-only to Repayment?
A lot of people switch from interest-only to repayment because, whereas they were only paying the interest on their mortgage, they now want to chip away at the outstanding balance each month. This way, by the time the mortgage life expires (typically 25years), the entire loan amount would be paid for, consequently eliminating lump sum payments at the end of the policy. Switching from Interest-only to repayment will make monthly payments significantly more because the borrower will now be paying off the loan and the interest on the loan.

Why switch from Repayment to Interest-only?
If the repayment method suddenly becomes too expensive for a borrower due to a reason like a drop in income, then it’s probably a good idea to switch to interest-only. By switching to interest-only, monthly mortgage payments will drop significantly, consequently making life a little easier. Remember, once the borrower gets into a better financial position, they can once again switch back to a repayment method of paying their mortgage.

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