Part and part mortgages

When exploring the world of mortgages, it’s easy to feel overwhelmed by the variety of options available. One option that often raises questions is the Part and Part mortgage ( part repayment and part interest mortgage ). This unique type of mortgage, available in the UK, combines elements of both repayment and interest-only mortgages. This means that part of your mortgage is paid back on a regular repayment basis, covering both the capital and the interest, while the remaining part is paid on an interest-only basis.

While it might seem complicated at first glance, understanding the details and workings of a Part and Part mortgage could unlock potential advantages for your property ownership journey. Let’s dive into the world of Part and Part mortgages and uncover everything you need to know to make an informed decision.

What is a part and part mortgage?

A part and part mortgage is a type of mortgage that combines elements of both repayment and interest-only mortgages. In other words, part of the mortgage capital is paid back on a regular basis along with interest (as in a repayment mortgage), while the remainder is treated as an interest-only loan where only the interest is paid each month, and the capital balance is repaid at the end of the mortgage term.

This means that, for the repayment part of the mortgage, each monthly payment reduces the amount you owe for that portion of the loan. However, for the interest-only part of the mortgage, you’re only paying the interest charges each month, and the capital balance doesn’t reduce over time – it will need to be repaid in full at the end of the mortgage term.

Part and part mortgages can provide more flexibility than other types of mortgages because they allow you to manage your monthly payments in a way that suits your financial circumstances. However, they also require careful planning and potentially a robust repayment strategy to ensure the interest-only portion can be paid off at the end of the term.

How does a part and part mortgage work?

A part and part mortgage works by dividing the total loan amount into two separate portions: one part that operates on a repayment basis and another on an interest-only basis.

Repayment portion: For the repayment part of the loan, you’ll make monthly payments that consist of both interest and principal. As you make these payments, the principal amount of this portion gradually reduces, and by the end of the mortgage term, it will be fully paid off.

Interest-only portion: The interest-only part of the loan requires you to pay only the interest on that portion each month. The capital amount for this part remains the same throughout the term of the mortgage and must be paid off in a lump sum at the end of the term. You’ll need a clear strategy for how you intend to do this, whether through savings, investments, the sale of the property, or other means.

Interest rates and terms: The interest rates and terms for both portions might be the same, or they may differ, depending on the lender’s policies and your particular agreement. It’s essential to understand the terms for both parts of the mortgage.

Flexibility: A Part and Part mortgage offers flexibility, allowing you to tailor the balance between the repayment and interest-only portions to suit your financial situation and preferences. You may even have the option to switch between the two during the term, depending on the lender’s policies.

End of term considerations: As you approach the end of the mortgage term, you must have a plan in place to pay off the interest-only portion of the loan. Failure to do so could result in needing to sell the property or refinance to cover the outstanding balance.

Lender criteria: Not all lenders offer Part and Part mortgages, and those that might have specific criteria regarding the ratio between the repayment and interest-only portions, as well as requirements for the repayment strategy for the interest-only part.

A part and part mortgage offers a balance between the predictability of fully repaying part of the loan and the potentially lower monthly payments of an interest-only product. It requires careful management and understanding of both the benefits and risks involved in this type of mortgage structure.

Advantages of having a part and part mortgage

Part and part mortgages can offer a number of advantages depending on an individual’s specific financial circumstances and long-term plans. Here are a few potential benefits:

Flexibility: This type of mortgage can be adjusted to fit individual income levels and lifestyle choices. The split between the repayment and interest-only part can be adjusted according to what one can afford to repay each month.

Lower monthly repayments: Because a portion of the mortgage is on an interest-only basis, the monthly repayments can be lower than a full repayment mortgage. This can make it more manageable on a month-to-month basis.

Potential for investment: The money saved from lower monthly repayments could potentially be invested elsewhere. If the investments perform well, they may provide a higher return than the cost of the mortgage interest.

Repayment strategy: The interest-only portion allows you to plan your own repayment strategy, such as using an endowment policy, stocks and shares ISA, or other investment, or perhaps planning to downsize your property in the future.

Overpayment opportunities: Some lenders allow overpayments on the repayment portion of the mortgage without incurring penalties. This can reduce the overall length of the mortgage term.

Balance reduction: Because part of the mortgage is repaid regularly, the total outstanding balance does reduce over time, albeit slower than a full repayment mortgage.

Keep in mind that while these are potential benefits, whether or not they apply to you depends on your personal financial situation, the terms of the specific mortgage product, and the broader financial environment. Always consult with a financial advisor to understand the potential benefits in your individual circumstances.

Disadvantages of part and part mortgages

While Part and Part mortgages can offer flexibility and potentially lower monthly payments, they also come with certain disadvantages that are important to consider:

End-of-term lump sum: The biggest challenge with a Part and Part mortgage is the need to repay the interest-only portion at the end of the mortgage term. If you don’t have a solid plan in place to build up these funds, you could risk being unable to repay this lump sum.

Investment risk: If your repayment strategy for the interest-only portion depends on investments, there’s a risk that these might not perform as well as expected. If they underperform, you may fall short when it’s time to repay the capital.

Property sale dependence: If your strategy for repaying the interest-only part is selling your property, market conditions at the end of the term may not be favourable. If property prices fall, you may not get enough from the sale to cover the repayment.

Higher total interest: As you’re only paying off part of the capital each month, you’ll generally pay more interest over the life of the loan compared to a full repayment mortgage.

Limited availability: Not all lenders offer Part and Part mortgages. Additionally, those that do may impose stricter eligibility criteria and may limit the proportion of the mortgage that can be on an interest-only basis.

Potential for negative equity: If property prices fall significantly, you could find yourself in a situation of negative equity, where the value of your property is less than the outstanding mortgage debt.

Complicated management: Managing a Part and Part mortgage can be more complex than a standard repayment mortgage. It requires careful budgeting and financial planning to ensure both parts of the loan are effectively handled.

Considering these potential downsides is crucial when thinking about a Part and Part mortgage. It’s always advisable to seek professional financial advice before committing to this or any type of mortgage product.

How to apply for a part interest and part repayment mortgage

Applying for a Part and Part mortgage, also known as a Part Interest and Part Repayment mortgage, generally follows a similar process to applying for any other type of mortgage in the UK. Here are the steps you would typically follow:

Assess your finances: Before you begin the application process, it’s crucial to understand your financial situation, including your income, savings, current debt, and credit history. These factors will influence the mortgage products you may be eligible for, and how much you can borrow.

Mortgage broker or direct: Decide whether to use a mortgage broker or apply directly to a mortgage lender. Brokers can offer advice and compare a range of mortgage products across different lenders, whereas going direct may be suitable if you already have a specific lender or mortgage product in mind.

Identify suitable lenders: Not all lenders offer Part and Part mortgages, so you’ll need to identify those that do. If you’re using a broker, they can help with this.

Calculate repayments: You’ll need to consider how you want to split your mortgage between the repayment and interest-only portions. Your lender or broker can help you understand how this will affect your monthly repayments and the total amount you’ll pay back over the mortgage term.

Repayment strategy: Lenders will want to see a credible plan for how you intend to repay the interest-only portion of the mortgage at the end of the term. This could involve savings, investments, a pension lump sum, or the sale of the property.

Application: Once you’ve chosen a suitable lender and mortgage product, you’ll complete a mortgage application. This will involve providing information about your income, expenses, and any existing debt. You’ll also need to provide supporting documents such as bank statements, payslips, and proof of identity.

Property valuation: The lender will arrange for a valuation of the property to ensure it offers sufficient security for the mortgage loan.

Mortgage offer: If the lender is satisfied with your application and the property valuation, they’ll issue a mortgage offer. This outlines the terms of the mortgage, including the interest rate, monthly repayments, and any conditions.

Legal process: Finally, a solicitor or conveyancer will handle the legal process of buying the property and setting up the mortgage, including contract exchange and completion.

Are there specific lenders in the UK that specialise in Part and Part mortgages, and how can I find them?

Part and Part mortgages aren’t a standard product that every lender offers and not all lenders that do offer them advertise them as a main product. The availability of such mortgages often depends on the lender’s policy at the time, the borrower’s financial circumstances, and the specific property involved.

While it’s challenging to list specific lenders that specialise in Part and Part mortgages without real-time information, it’s typically the case that many larger banks, building societies, and specialist lenders may offer this type of mortgage, either directly or through a broker. In the past, lenders such as HSBC, Barclays, and Santander have been known to offer this kind of mortgage. Please note this information may not be up-to-date.

To find these lenders, there are several steps you can take:

Online research: Start with a simple online search to see which lenders offer Part and Part mortgages. Some comparison websites may allow you to filter by mortgage type.

Mortgage brokers: A mortgage broker can be a valuable resource. They have a thorough understanding of the market and can advise you on which lenders are currently offering Part and Part mortgages and guide you through the application process.

Direct contact: Reach out directly to lenders, such as banks or building societies, to inquire if they offer Part and Part mortgages.

Financial advisors: If you have a financial advisor, they might be able to guide you towards suitable lenders.

Remember, the terms and conditions for Part and Part mortgages can vary between lenders, so it’s important to understand the details of any mortgage product before you commit. Always read the terms and conditions carefully, and consider seeking professional financial advice.

What fees or charges are typically associated with part and part mortgages?

The fees and charges associated with Part and Part mortgages ( part repayment and part interest mortgages ) typically align with those of other mortgage types. Here are some of the most common fees you might encounter:

Arrangement fee: This is a fee charged by the lender to set up the mortgage. It can sometimes be added to the loan, but this will result in you paying interest on it over the life of the mortgage.

Booking fee: Sometimes also called an application or reservation fee, this is an upfront cost that may need to be paid when you apply for the mortgage.

Valuation fee: This covers the lender’s cost of assessing the property to ensure it provides sufficient security for the loan.

Legal fees: These cover the cost of the legal work involved in setting up a mortgage. This is usually carried out by a solicitor or licensed conveyancer.

Broker fee: If you’re using a mortgage broker, they may charge a fee for their advice and for arranging the mortgage.

Higher lending charge: If you’re borrowing a high proportion of the property’s value, the lender may charge a fee to cover the higher risk.

Early repayment charge (ERC): If you repay the mortgage, or a substantial part of it, within a certain period (usually during an initial fixed or discounted rate period), the lender may charge a fee.

Exit fee: Some lenders charge a fee when you fully repay your mortgage, either at the end of the term or earlier.

The specific fees and amounts can vary widely between different lenders, and can also depend on the specific terms of the mortgage product. It’s important to understand all the potential costs before committing to a mortgage. Always make sure to ask your lender or broker to explain any fees or charges you’re unsure about.

Paying back the interest only part

When it comes to repaying the interest-only portion of a Part and Part mortgage, it’s important to remember that throughout the term of the mortgage, you are only paying off the interest on this portion, not the capital. This means that at the end of the term, the capital amount for this portion of the loan remains outstanding and must be paid back in full.

Repaying this capital requires a clear and robust strategy, which should be set up at the outset and approved by the lender. This strategy could involve a range of options.

For some, they might choose to sell their property to repay this lump sum. However, this relies on property prices remaining stable or increasing. If property prices fall, you might not get enough from the sale to cover the remaining capital and may need to find additional funds to pay off the mortgage.

Others might use other investments or savings to repay the capital. This could include stocks and shares, an ISA, or a pension lump sum. These strategies rely on your investments performing well and may carry a degree of risk.

A final option could be to switch to a full repayment mortgage during the term, which will start to pay down the capital. However, this will increase your monthly payments.

Can I remortgage mid-term?

Yes, you can remortgage mid-term, although there are some important considerations to bear in mind. Remortgaging means switching your current mortgage deal either by moving to a different deal with your existing lender or switching to a new lender altogether.

However, remortgaging mid-term, particularly during an initial fixed or discounted rate period, could involve early repayment charges. These can be substantial, often a percentage of the outstanding loan, so you need to factor this into your decision.

In addition, you may need to pay arrangement and valuation fees for the new mortgage, as well as legal fees. Some lenders might offer deals where they cover some or all of these costs.

Before deciding to remortgage, it’s essential to weigh the benefits, such as a lower interest rate or changing to a different type of mortgage, against the costs involved.

How do the interest rates on Part and Part mortgages compare with other mortgage options?

The interest rates on Part and Part mortgages don’t typically differ from those of standard mortgages simply because a portion of the mortgage is interest-only. The rates are generally determined by the same factors that influence all mortgage rates, such as the Bank of England base rate, the lender’s own policies, your personal financial circumstances, and the overall economic environment.

However, the specific mortgage product you choose, whether it’s a fixed-rate, variable-rate, or tracker mortgage, will affect the interest rate you receive. Additionally, the size of your deposit and the loan-to-value ratio of the mortgage can also impact the interest rate.

Bear in mind that while a Part and Part mortgage might reduce your monthly repayments because a portion of the mortgage is interest-only, over the long term, you might pay more interest compared to a repayment mortgage. This is because the capital sum of the interest-only portion isn’t reducing over time, so you’re paying interest on a larger sum for the duration of the mortgage.

Are part and part mortgages suitable for first-time homebuyers or only for specific types of properties?

Part and Part mortgages could potentially be suitable for first-time homebuyers, but it really depends on the individual’s financial circumstances and future plans. First-time buyers who expect their earnings to increase over time might find this kind of mortgage appealing as it could offer lower initial monthly payments due to the interest-only portion.

However, it’s important to remember that with a Part and Part mortgage, you need a clear strategy to repay the capital sum of the interest-only portion at the end of the mortgage term. As a first-time buyer, it’s crucial to understand this commitment and have a realistic plan in place.

In terms of property types, Part and Part mortgages aren’t limited to specific kinds of properties. They can be used for buying a variety of residential properties. However, the property’s value and the borrower’s deposit amount will affect the loan-to-value ratio, which can influence the lender’s willingness to offer this type of mortgage and the terms they offer.

While a Part and Part mortgage can offer flexibility, it’s not for everyone. It comes with risks and requires careful financial planning and management.

What proportion of the mortgage is typically on an interest-only basis, and what proportion is on a repayment basis in a Part and Part mortgage?

The proportion of a Part and Part mortgage that’s on an interest-only basis versus a repayment basis can vary significantly and is largely up to negotiation between the borrower and the lender. The specific split will depend on factors such as the borrower’s income, their ability to make monthly repayments, and their plan for repaying the interest-only portion of the loan.
Some borrowers might opt for a 50/50 split, where half of the mortgage is interest-only, and the other half is repayment. Others might have a smaller proportion, such as 25%, on an interest-only basis, with the remaining 75% on a repayment basis.

The lender will also consider the loan-to-value (LTV) ratio of the mortgage. Lenders often require a lower LTV for the interest-only portion, which could affect the proportion of the loan that can be interest-only.
It’s important for borrowers to carefully consider their financial circumstances and future plans when deciding on the split between the interest-only and repayment parts of the mortgage.

Switching to a repayment mortgage

Switching from a Part and Part mortgage to a full repayment mortgage is a decision that some homeowners may consider, particularly if their financial circumstances have changed or they’re concerned about repaying the interest-only portion of the mortgage at the end of the term.

By switching to a repayment mortgage, your monthly payments will increase, but you’ll gradually pay off the capital sum of the loan alongside the interest. This means that at the end of the mortgage term, provided you’ve made all the repayments, you’ll have paid off the mortgage in full.

To switch to a repayment mortgage, you’ll need to discuss this with your current lender. They’ll assess your financial circumstances, including your income, expenses, and other financial commitments, to ensure you can afford the higher monthly payments.

Depending on the terms of your current mortgage, you might also need to pay an early repayment charge or other fees.
If your current lender doesn’t agree to the switch, or if you want to look for a better deal, you could consider remortgaging with a new lender. Again, you’ll need to consider any fees or charges associated with this.

Switching to a repayment mortgage is a significant decision, and it’s important to seek professional financial advice to understand the potential implications and ensure it’s the right choice for your circumstances.

What if my income has changed?

If your income changes during the term of your Part and Part mortgage, it could have an impact on your mortgage situation. The effect largely depends on whether your income has increased or decreased.

If your income has increased, you may have more financial flexibility. You could consider overpaying your mortgage if your terms and conditions allow it. This would reduce the amount of debt and the overall amount of interest you’ll pay. Alternatively, if you were thinking about switching to a repayment mortgage, the increased income might make the higher monthly payments more affordable.

However, if your income has decreased, it might be more challenging to meet your monthly mortgage payments. If you’re struggling, it’s crucial to communicate with your lender as soon as possible. They may be able to help by extending the term of your mortgage, temporarily switching you to interest-only payments, or offering a payment holiday.

But remember, these are only temporary measures and you’ll still need to repay the capital at the end of the mortgage term. If you’re experiencing long-term financial difficulties, seeking advice from a debt advisor may be beneficial.

Changes in income could also affect your strategy for repaying the interest-only portion of your mortgage. If this is likely to be the case, again, it would be wise to seek professional advice.

In all scenarios, it’s important to review your mortgage in the context of your overall financial situation whenever there are significant changes in your income.

Calculating part and part mortgage repayments

Calculating the monthly repayments for a Part and Part mortgage involves considering the repayment portion and the interest-only portion separately.

For the repayment portion of the mortgage, your monthly repayments will consist of a portion of the capital sum borrowed plus interest. The exact amount will depend on the interest rate and the term of the mortgage.

For the interest-only portion, your monthly payments will just cover the interest on the capital sum borrowed. The amount of interest you pay each month will depend on the size of the loan and the interest rate.

To calculate the overall monthly repayments for a Part and Part mortgage, you would therefore add together the monthly repayments for the repayment portion and the interest-only portion.
Here’s a simplified example:

Let’s say you have a Part and Part mortgage of £200,000, where £100,000 is on a repayment basis, and £100,000 is on an interest-only basis. Your interest rate is 3%.

The monthly repayment for the repayment portion (let’s say over a term of 25 years) would be around £474, while the monthly interest payment for the interest-only portion would be about £250 (£100,000 x 0.03 / 12).

So, your total monthly payment would be about £724 (£474 + £250).

Bear in mind that this is a simplified calculation and doesn’t take into account any changes in the interest rate over the term of the mortgage or any fees or charges.

Is mortgage advice worth having?

Yes, getting professional mortgage advice can be very beneficial, especially for complex mortgage products like Part and Part mortgages. A qualified mortgage advisor can help you understand the advantages and disadvantages of different mortgage options and can guide you towards the one that suits your financial circumstances and future plans best.

A mortgage advisor can also help you understand the full costs of a mortgage, including fees and charges that you might not be aware of. They can explain the terms and conditions of the mortgage, including what happens if you want to overpay or if you can’t make your repayments.
In addition, mortgage advisors often have access to a wide range of mortgage products, including some that aren’t available directly to the public. They can also handle much of the application process for you, which can save you time and effort.

It’s important to remember, though, that while mortgage advisors can provide valuable advice, the final decision is always yours. It’s crucial to feel comfortable with the mortgage product you choose and understand all the associated costs and commitments.

So, while there is usually a fee for professional mortgage advice, the insights and guidance a mortgage advisor can provide often makes it a worthwhile investment. Just be sure to choose an advisor who is fully regulated by the Financial Conduct Authority (FCA) to ensure you’re getting reliable, responsible advice.

Part and part mortgages summary

A Part and Part mortgage ( part repayment and part interest mortgage ) is a type of mortgage that combines elements of both repayment and interest-only mortgages. A portion of the loan is set up on a repayment basis, meaning that monthly repayments cover both the capital and the interest, while the remaining portion is set up on an interest-only basis, meaning that the monthly repayments only cover the interest.

The main advantage of a Part and Part mortgage is the lower monthly repayments compared to a full repayment mortgage, as part of the mortgage is interest-only. However, this comes with the significant caveat that a lump sum will remain to be paid at the end of the mortgage term, which corresponds to the capital of the interest-only part.

When considering a Part and Part mortgage, it’s crucial to have a clear and viable strategy for repaying the capital sum at the end of the mortgage term. This could involve selling the property, using savings or investments, or switching to a repayment mortgage partway through the term.

Interest rates on Part and Part mortgages are typically determined by the same factors as any other mortgage and are not generally influenced by the split between the repayment and interest-only portions.

If your income changes or you’re thinking about remortgaging or switching to a repayment mortgage, it’s essential to seek professional advice to understand the implications and make sure any decision is right for your circumstances. Overall, while a Part and Part mortgage can offer flexibility, it requires careful financial management and planning.