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Telegraph
17 hours ago
- Business
- Telegraph
What is a part and part mortgage?
If you're undertaking the often daunting task of choosing a mortgage, not only will you need to look at the type of mortgage you want – fixed or tracker – you'll need to select the length of the deal you want, as well as the repayment option that suits you. Usually, you'll need to choose between repayment – where you'll pay off both the loan interest and capital amount you've borrowed – or interest-only, where you just pay the interest. But there's a lesser-known hybrid version that could suit you, too. This is often referred to as a 'part and part' mortgage. Here, Telegraph Money explains how these deals work and the pros and cons you should consider before taking one on. What is a part and part mortgage? How does a part and part mortgage work? Advantages of this mortgage deal Disadvantages of part and part mortgage s Part and part mortgage FAQs What is a part and part mortgage? A part and part mortgage – also known as 'part interest-only' – is a combination of repayment and interest-only mortgages. Since part of your home loan will be on interest-only, there will still be an outstanding amount to be repaid in full at the end of your mortgage term. Nicholas Mendes, from broker John Charcol, said: 'Used well, part and part can strike a balance between reducing monthly payments and maintaining some capital repayment. 'But there's a clear trade-off. If the repayment plan doesn't materialise, you're left with a significant balance to clear at the end of the term.' How does a part and part mortgage work? As an example, you could get a part and part mortgage for £350,000, with £200,000 on a repayment basis, while the remaining £150,000 is interest-only. This kind of set-up would make for smaller monthly payments, since you're essentially removing the capital repayment element on a portion of your borrowing. However, at the end of the term, you'll need to pay off the full interest-only amount – in this case, £150,000. To be eligible for even a small element of interest-only, you will need to demonstrate that you have a repayment strategy in place – that is, evidence that you have a means of repaying the debt when the time comes. This could be money saved in a stocks and shares Isa, an endowment policy, the sale of a second home or a pension fund. Lenders will usually have a limit on how much of the mortgage can be allocated as interest-only, and this could also vary depending on your circumstances. Income thresholds are often higher, said Mr Mendes, usually starting from £50,000 to £100,000 for single applicants, and most lenders will cap the amount you can borrow at 50 to 75pc for that portion of the mortgage. To reduce the interest-only lump sum that's due when the mortgage term ends, you might be able to apply to increase the portion of your mortgage on repayment in the future to continue chipping away at the original amount you borrowed. Advantages of this mortgage type Your monthly payments will be lower than with a repayment mortgage. These mortgages can be helpful if you're on a strict budget, when property prices are high, or interest rates are rising. A relatively small saving of even a couple of hundred pounds per month could make all the difference to securing the home you want. If you already have an interest-only mortgage, going for 'part and part' can help you start chipping away at the capital, without the shock of going all in. Part and part mortgages are flexible, which means that you can make overpayments if you can afford to. However, this will only be applied to the repayment portion of the mortgage, so the limits before early repayment charges (ERCs) kick in will be lower. It's best to check these details with your lender before you make any overpayments. Disadvantages of part and part mortgages You will pay more interest overall compared to a repayment mortgage. It could take longer to pay off your mortgage. Mortgage lenders may have limits on how much of your mortgage can be interest-only. You will need to have a means of paying off the chunk of interest-only borrowing when the term ends. If you can't, you'll be at risk of losing your home. Part and part mortgage FAQs Can I use a part-and-part mortgage on any type of mortgage deal? A part and part repayment mortgage is available on a fixed rate, discounted rate or tracker loan. The key is whether the lender will approve it according to your affordability and how you intend to repay the remaining debt at the end. Which lenders offer part and part mortgages? Not all lenders offer this choice and have repayment or interest-only as the only options. Halifax, HSBC, Leeds Building Society and Skipton Building Society are among the lenders that do offer part and part options. It's worth checking before you apply if it's offered. How do I get a part and part mortgage? You'll need to apply for your home loan in the same way as any other and pass affordability and credit checks. Since part and part repayments aren't available from all lenders, it might be more straightforward to enlist the help of a mortgage adviser who can help find a home loan to suit you. Beforehand, you could speak to your existing lender to see what they can offer. Can I switch to a repayment mortgage later? When you come to remortgage, you may be able to switch to a full repayment mortgage if you want to. However, note that this will usually mean an increase to your monthly payments, and your lender will want to make sure this is affordable for you. How do I know if a part and part mortgage is right for me? A part and part mortgage might be useful if you're paying interest-only at the moment and want to make a move towards repayment – but not going the whole way. It can help ease into higher repayments. It could also help if you're soon to receive a windfall – perhaps inheritance or a big bonus from work, and need to keep repayments lower until the money lands. If in doubt, a mortgage adviser will be able to help find the best mortgage for you.
Telegraph
29-03-2025
- Business
- Telegraph
The small print that turned one million flat owners into mortgage prisoners
Sky-high ground rent charges are turning flat owners into 'mortgage prisoners', experts have warned. Nearly one million leases have escalating ground rents, according to the Competition and Markets Authority (CMA), meaning the annual charge increases over time. Mortgage lenders often require certain conditions to be met before lending against these properties – for example, the annual ground rent cannot exceed 0.1pc of the property's value. However, experts said 'toxic' increases led by high inflation in recent years had left some flat owners trapped in 'unsellable properties'. Ground rent is an annual fee paid by leaseholders to the freeholder for the right to occupy the land their property is built on. Earlier this month, the Government introduced a white paper replacing leasehold systems, where third-party landlords owning the building belonging to several flats will be replaced with 'commonhold' schemes, which will give all owners more control over the buildings they live in. In addition, new buildings will no longer pay 'ground rent'. While the Leasehold and Freehold Reform Act 2024, passed under the previous government but not yet fully in force, includes some ground rent measures, neither a £0 or £250 cap have been legislated for. Britain's consumer watchdog, the CMA, has separately banned freeholders and developers from ground rent clauses that double the payment every review period; however, they can still increase them by the retail price index (RPI). Over the past few years, the RPI rose rapidly and spiked at 14pc in November 2022. Paula Higgins, of the Homeowners Alliance said: 'The CMA rightly stamped out doubling ground rents, but now some lenders are refusing mortgages on properties with RPI-linked increases or rent reviews every 10 years or less. What once seemed reasonable has become toxic under high inflation, trapping hard-working homeowners in unsellable properties.' For example, if your ground rent was charged at £290 a year in January 2020, it would rise with the RPI to £391 this year, an increase of 35pc, and would require the property to be worth over £391,000 in value to be compliant with lenders' terms. Nicholas Mendes, of brokerage John Charol, said ground rents were becoming 'more topical' with lenders. Mr Mendes said: 'Lenders are more aware of it from their level, looking at it and giving brokers the right guidance.' He added that many borrowers have opted to use product transfers in recent years that do not require their property to be revalued. However, he said that when the market settles in 'a year or two, more issues will come to light'. Leaseholders in a 122-flat development in Illford, east London, are subject to ground rent charges that increase every five years by the retail price index (RPI). The charge, which is in breach of most banks' lending terms, means the homeowners can no longer sell or remortgage. The freeholder, The Freehold Corporation, has Labour peer, Lord Carter of Coles, as a director. The company collects the payment through its operating company Emerald Ground Rent. David Hollingworth, of brokerage L&C, said: 'Lenders will have general guidelines around what clauses are likely to be acceptable. That's put an end to the doubling of ground rent every five years that was so problematic for some. 'Being linked to RPI can be acceptable but anything that could be seen as enough to affect the 'marketability' of the property. The valuation could pick up on an onerous ground rent which would affect the lender's security and so could result in a decline by the mortgage lender.' Harry Scoffin, the founder of the campaign group Free Leaseholders, added: 'Onerous ground rent is destroying people's homes, money and lives. It is also jamming up the flats market as a number of lenders refuse to mortgage them. Ground rent victims are the new mortgage prisoners. 'According to the latest Competition and Markets Authority data, around 940,000 leases have escalating ground rents. In its investigations, the CMA has also raised eyebrows at some RPI clauses. 'We know of increasingly desperate leaseholders trying to extend their leases or buy the freehold to remove onerous ground rents, but it's punitively expensive. Leaseholders who come to us just don't have a spare £20,000 lying around at the back of their sofa.' An MHCLG spokesman said: 'Far too many leaseholders across the country struggle with punitive and escalating ground rents. 'We remain firmly committed to tackling unregulated and unaffordable ground rents, and we will deliver this in legislation, with further details set out in due course.'
