Part and Part Mortgages

What is a part and part mortgage?

A part and part mortgage combines elements of the two usual mortgage repayment methods — capital repayment and interest-only. Also referred to as a part interest and part repayment mortgage, it’s a more flexible option for your mortgage payments.

With a repayment mortgage, you repay some of the loan amount (the capital) each month as well as the interest. That way, when your mortgage term ends, the loan is completely repaid and you own your home outright. With an interest-only mortgage, you only pay the interest due on the loan each month — you don’t repay any of the capital. This makes it a cheaper option than a repayment mortgage but the entire loan has to be repaid at the end of the mortgage term.

Providing some middle ground between the two options, a part and part mortgage allows you to repay a smaller amount of the loan each month than with a repayment mortgage. You still pay the interest as normal. This is a good option if you need to keep your monthly payments lower than they would be with a repayment mortgage. However, you need to bear in mind that there will still be an outstanding balance to repay when your mortgage term ends.

How does a part and part mortgage work?

When you opt for a part and part mortgage, you need to agree on a percentage split between the repayment and interest-only aspects for your monthly payments. This isn’t usually a 50/50 split as you might expect. Instead, part and part mortgage lenders tend to limit the interest-only portion to reduce their risk. It’s more likely that a split of 80% for the repayment portion and 20% for the interest-only portion will be agreed. The percentage split tends to depend on the loan-to-value (LTV) ratio that has been offered.

As your monthly repayments won’t cover all of the loan borrowed, you’ll have to provide the lender with details of how this balance will be repaid at the end of the mortgage term. This is called a repayment vehicle. It’s the same requirement that a lender expects when you take out an interest-only mortgage. For example, you may have savings or investments that you can use or you may decide to sell the property.

As well as the flexibility of the monthly payment aspect, your lender may allow you to switch to a repayment option during the term. This may suit you if your financial situation changes in the future. Whether or not this option is available will depend on your lender’s terms.

Repayment strategies for a part and part mortgage

As a part and part mortgage has an interest-only element, you won’t repay any of the capital for this portion. Therefore, just as is the case when applying for an interest-only mortgage, you need a repayment plan for the outstanding balance at the end of the term. Also called a repayment strategy, it has to be approved by your lender. Repayment vehicles include:

• Selling the property
• Selling a different property
• Using savings
• Using investments, such as a pension fund, an ISA, an endowment policy or stocks and shares
• Switching to a repayment mortgage

The eligibility criteria for a part and part mortgage

The interest-only component of a part and part mortgage increases the lender’s risk. As such, the eligibility criteria are stricter than for a repayment mortgage. You need to have a substantial deposit, such as 15%, as the maximum loan-to-value (LTV) ratio for this type of mortgage tends to be 85%. You also need to pass the affordability checks. As a part and part mortgage is considered to be more risky, many lenders only accept applicants with high earnings, such as £75,000, or substantial equity.

Having a good credit rating improves your chances of a successful mortgage application. More importantly, you have to prove that your repayment strategy for the outstanding balance is viable. Your age and the type of property you’re buying will also be taken into account. A non-standard property increases a lender’s risk and may result in them being unwilling to offer you a part and part mortgage. However, we work with specialist lenders who are well-versed in dealing with non-standard properties if this applies to you.

The costs involved for a part and part mortgage

As well as the interest rate payable for your mortgage, there are various other mortgage costs to consider. These can include:

Arrangement fee

Also known as the completion fee or product fee, an arrangement fee is charged by the lender for setting up the mortgage. It may be possible to add this fee to your loan. However, doing so will not only increase the overall amount you owe but you’ll be charged interest on this extra amount and your monthly payments will increase as a result.

Booking fee

Some lenders charge this fee when you apply for a mortgage. Also called a reservation fee or an application fee, it’s non-refundable, even if your application is denied. Some lenders include this fee in the arrangement fee.

Valuation fee

The property you’re buying has to be assessed to check its value is consistent with how much you want to borrow. This is because if you default on the mortgage, the lender would have to repossess your property and sell it. A valuation is different from a survey, during which a surveyor checks the condition of the property and notifies you of any potential issues. You are responsible for having a survey carried out.

Mortgage account fee

This covers the administration costs for your mortgage. Usually, if you’ve been charged a mortgage account fee, you won’t have to pay an exit fee.

Telegraphic transfer fee

Also known as a CHAPS (Clearing House Automated Payment System) fee, this is charged by the lender to cover their costs when transferring the mortgage funds to your solicitor. This fee is usually non-refundable, which means that it’s unlikely you’ll get your money back if your deal falls through after you’ve paid it.

Higher lending charge

Some lenders charge this fee if you have a small deposit and are, therefore, borrowing a high percentage of the property’s value. As a way to cover the lender’s increased risk, it pays for their insurance if you’re unable to repay your mortgage and they have to repossess your property and then sell it at a loss.

Early repayment charge

If you repay all or a significant part of your mortgage before the agreed deal period or mortgage term, you may be penalised with an early repayment charge. This also applies if you want to switch to a new deal before your current deal’s tie-in period has ended.

Exit fee

You may be charged an exit fee, also called a closure fee, when you repay your mortgage in full, even if you’re not repaying it early. This covers the lender’s costs for closing your account. However, if you’ve previously paid a mortgage account fee, you’re not usually charged an exit fee.

Aside from these mortgage-related costs, you’ll also need to budget for other costs when buying a property. For example, a survey, stamp duty, the legal fees, the property insurance and the moving costs.

How do you apply for a part and part mortgage?

You apply for a part and part mortgage in the same way that you would for either a repayment or interest-only mortgage. The lender will check your affordability, including your income, expenditure, outstanding debts and deposit, as well as your creditworthiness. This will determine how much the lender is prepared to lend you. Just like an interest-only mortgage, you’ll have to provide the lender with a viable repayment strategy for the end balance.

The difference with a part and part mortgage application is that you need to agree on the repayment and interest-only split with the lender. As mentioned earlier, the interest-only aspect is likely to be much smaller than the repayment portion. Some part and part mortgage lenders set a limit for how much they’re prepared to offer on an interest-only basis. This means that the bulk of each monthly payment is likely to be for the repayment aspect of your mortgage.

Get expert advice on part and part mortgages

If you think that a part and part mortgage may suit your circumstances better than a repayment or interest-only option, speak with our mortgage brokers for impartial, expert advice. They can check your affordability and guide you on what to expect for the repayment and interest-only calculations. They can also check the viability of your repayment plan for the outstanding balance at the end of the mortgage term. If you’re concerned about your credit score, they can advise you on how to improve it before submitting your mortgage application. If you have an adverse credit rating, we deal with specialist bad credit lenders who offer more flexible lending solutions. Should the property you’re buying be classed as non-standard, we can approach specialist lenders that handle these types of applications.

At Trinity Finance, we can help with other aspects related to your purchase too. As well as your mortgage, we can arrange your home insurance and mortgage payment protection insurance, if required. If you don’t already have a solicitor to handle the transaction for your purchase, we can recommend one for you. Just give us a call on 01322 907 000 when you’re ready to get started. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage brokers will reply to you as quickly as possible with further information relating to part and part mortgages.

The benefits of a part and part mortgage

Having a part and part mortgage provides a flexible compromise between a repayment and an interest-only mortgage. The various benefits include:

• Lower monthly payments than for a repayment mortgage
• An increased affordability for your mortgage due to the lower monthly payments
• The flexibility to agree on the repayment and interest-only portions with your lender
• The repayment portion of your monthly payments gradually reduces the loan balance
• You repay a sizeable chunk of the capital throughout the mortgage term as the repayment portion is usually much higher than the interest-only portion of your payments
• Your repayment vehicle doesn’t need to cover as much as it would need to for an interest-only mortgage
• The overall interest payable is lower than for an interest-only mortgage as it’s calculated on the decreasing loan balance
• Some lenders allow you to make overpayments for the repayment aspect without penalising you, reducing the loan balance owed
• You may be able to switch to a repayment mortgage at a later date

The drawbacks of a part and part mortgage

As with any type of mortgage, it’s important to consider the drawbacks too, as detailed below.

• Higher monthly payments than for an interest-only mortgage
• You still have an outstanding loan balance to repay at the end of the mortgage term
• This type of mortgage is not as readily available as repayment and interest-only mortgages
• The lender may have certain requirements for the portions to be paid on an interest-only and a repayment basis
• You have to provide the lender with an acceptable repayment strategy for the outstanding loan balance
• The overall interest payable is higher than for a repayment mortgage as the loan balance decreases at a slower rate
• Managing the two payment aspects is more complex
• There’s a potential repayment risk, such as investments underperforming or property prices falling, leaving you unable to repay the loan balance

Switching to a repayment mortgage

As your mortgage term will stretch across a long period, it’s highly likely that your financial circumstances will change at some point. For example, your repayment vehicle might not be performing as well as you’d expected and you know that it won’t be enough to cover the balance at the end of the term. Or you’re earning more than you were before and would like to repay more of the capital. In these circumstances, you can usually switch your part and part mortgage to a repayment mortgage.

As you’ll be repaying more of the capital each month with a repayment mortgage and this will be over a shorter period than if you’d had a repayment mortgage from the outset, your monthly payments will be a lot higher. The lender will need to ensure that you can comfortably afford these payments before allowing you to switch to a repayment mortgage. Make sure that if you switch to a repayment deal, you won’t be penalised with an early repayment charge (ERC). For example, an ERC may apply if you switch during a period when a fixed or discounted rate is in place.

What about an interest-only mortgage?

It’s much harder to be approved for a switch from a part and part mortgage to an interest-only mortgage. Not all lenders will agree to do this as there’s more risk involved. If your lender will consider the switch, you’ll need to show that your repayment vehicle can adequately cover the larger balance that will be due at the end of the mortgage term.

Should you consider a part and part mortgage?

Whether or not a part and part mortgage is right for you depends on your circumstances. This type of mortgage can be very appealing because of its flexibility and affordability. For a start, you can negotiate the repayment and interest-only aspects of your payments with the lender. The main appeal, though, is that you can repay some of your loan throughout the term while benefiting from lower monthly payments than you’d have with a repayment mortgage.

However, you need to remember that the interest-only aspect of the mortgage will leave you with an outstanding loan balance to repay at the end of the term. This balance will be considerably lower than the full loan amount that would be due with an interest-only mortgage but you still need a viable repayment plan.

Alternatives to a part and part mortgage

If you’re undecided on the suitability of a part and part mortgage for meeting your financial needs, there are alternative options to consider.

• Repayment mortgage: If you don’t have a repayment vehicle for the interest-only aspect of a part and part mortgage and you can afford to make higher monthly payments, then consider a full repayment mortgage.
• Interest-only mortgage: If your prime concern is having lower monthly payments and you have a solid repayment strategy for the outstanding loan payable at the end of the term, then an interest-only mortgage may be the best choice for you.
• Joint mortgage: When you take out a joint mortgage with another borrower, you can share the mortgage payments between you. This makes a joint mortgage much more affordable than having one solely in your name.

We remove the complexity of arranging a part and part mortgage

Part and part mortgages aren’t offered as commonly as repayment and interest-only mortgages. The repayment aspect can also be complicated compared with the alternatives. That’s where we come in. With unrestricted access to the market, our mortgage brokers know which lenders provide this hybrid mortgage. They can discuss this type of mortgage with you in depth to ensure that you’re fully aware of your financial liability. They can also show you comparisons between part and part mortgage deals and those for both repayment and interest-only mortgages.

Having provided you with impartial advice and checked your suitability, they can then search for the best part and part mortgage deals on your behalf. Before submitting an application to a lender, our expert brokers will ensure that your repayment strategy meets that lender’s requirements. Once your application is in, your dedicated mortgage broker will oversee the process from start to finish.

By taking advantage of the services we offer at Trinity Finance, you can rely on expert guidance throughout as well as a straightforward and stress-free process. To get started, simply give us a call on 01322 907 000. If you prefer, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form. One of our specialist brokers will reply to you as quickly as possible with more information about part and part mortgages.