When it comes to mortgage repayment methods, there is no one-size-fits-all solution. Most people opt for full repayment, while others choose interest-only repayment methods. There are also those who go for a combination of the two, known as part repayment and part interest only mortgages.
Part and part mortgages offer a bit of both worlds and can be a good way to keep your monthly repayments down.
We take a look at what a part and part mortgage is, how it works and whether it could be the right option for you.
What is a part repayment and part interest only mortgage?
As the name suggests, a part and part mortgage is a mixture of repayment and interest only repayment methods under one mortgage. For the right borrower this added flexibility can be very useful, tailoring the mortgage setup to their needs.
You need to decide how your overall mortgage amount will be split before you can apply for a mortgage.
For example:
For a mortgage of £250,000 you could have £200,000 as capital & interest and £50,000 as interest only. Naturally, when this mortgage arrangement comes to an end you will still owe the interest only portion of £50,000.
How does it work?
There’s no set way that all part and part mortgages work. You will need to agree with your lender how you want the mortgage amount to be split and over what period of time.
Although the structure of a part repayment, part interest mortgages tend to be flexible and negotiable, it’s fair to say that a lender will want most of your mortgage on a full repayment basis.
Your mortgage application will need to explain why you want a part and part mortgage along with a viable strategy of how the interest-only component will be repaid. This portion of the loan will never reduce as you are not repaying any of the capital borrowed through the monthly repayments.
Your plan may be to repay this all in one go at the end of the mortgage, perhaps by selling a second property or by downsizing. Alternatively, you could chip away at the balance by making ad hoc lump sum repayments as these become available.
What are the benefits of a part and part mortgage?
The main benefit of part and part mortgages is that they offer increased flexibility over other repayment methods, such as full capital repayment or interest only.
Part and part mortgage can be a good way to keep your monthly repayments down, as you’re only making repayments on a portion of your overall mortgage amount.
If you know that you will have a lump sum available in the future, then this setup just makes your payments that bit smaller. It is important to remember that the interest only part will cost more in interest because the balance will stay the same for the whole mortgage term. You will need to make a judgement on which is the most worthwhile option.
Let’s take a quick look at how the monthly payments are affected:
| NORMAL REPAYMENT MORTGAGE | |
| £250,000 over 25 years at 4% | £1,319.59 per month |
| NORMAL INTEREST ONLY MORTGAGE | |
| £250,000 over 25 years at 4% | £833.33 per month |
| PART AND PART MORTGAGE | |
| £200,000 over 25 years at 4% – Repayment | £1,055.67 per month |
| £50,000 over 25 years at 4% – Interest only | £166.67 per month |
| TOTAL MONTHLY PAYMENT | £1222.34 per month |
Who is this type of mortgage suitable for?
A full repayment mortgage guarantees that your mortgage debt will be fully repaid by the end. The lender will be recalculating your monthly repayments each time the interest rate changes to make sure you are on course.
This won’t happen with an interest-only mortgage and so there is an added element of risk should the repayment plan not be successful.
That said it is possible to make changes to your mortgage so that all of the loan is based on the repayment method.
It is suited to people who wish to have some flexibility now, along with lower payments, with the knowledge that they need to have an active plan for eventual repayment.
How to apply for a part repayment and part interest only mortgage
When you apply for a part and part mortgage, the lender will assess your application in the same way as they would for any other type of mortgage. They’ll look at your income, employment status, credit history and current financial commitments to decide whether you can afford the repayments.
You will need to provide a breakdown of how the mortgage is to be structured, between the two repayment methods.
You’ll also need to provide evidence of a viable repayment plan for the interest only portion of the mortgage. This could be in the form of savings or investments, or an explanation of how you intend to repay this amount by the end of the mortgage term.
Mortgages are available if you’re self-employed, but lenders are often cautious about lending to people with variable incomes and so you will need to provide robust proof of your earnings.
Depending on your situation, the lender may refuse your request for a part and part mortgage altogether, or they may suggest an alternative setup.
Switching to a repayment mortgage
If your circumstances change and you want to switch your mortgage to full capital repayment, you can usually do this at any time. Additionally, most lenders will allow you to make overpayments on your mortgage without charge, up to a certain limit.
You may be able to negotiate with your lender to extend this limit, or to make ad hoc lump sum repayments as and when you have the funds available.
If you’re considering switching from interest only to repayment, it’s important to consider the implications for your monthly budget. The switch will result in an increase in your monthly payments, as you’ll be repaying both the interest and some of the capital each month.
Is a part and part deal right for you?
A part and part mortgage could be a good option if you’re looking for increased flexibility over your repayments. It could also suit you if you know that you’ll have a lump sum available in the future, as this type of setup just makes your payments that bit smaller.
As with any mortgage, it’s important to shop around and compare the different deals on offer before making a decision. Use an online mortgage calculator to get an idea of how much you could be paying each month, and make sure to factor in any fees or charges that might apply.
Get the right advice
If you’re not sure whether a part and part mortgage is the right option for you, it’s always best to speak to an independent mortgage adviser first. They’ll be able to help you understand the different types of mortgages available, and give you guidance on which one would suit your individual circumstances.
Working with a broker ensures that you have access to the whole of the market, and not just the deals that your bank or building society offers.
Your adviser can also provide guidance on which lender to approach for a successful outcome.
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