3 days ago
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.
