When it comes to mortgages, there are various types available to suit different financial situations and goals. Sometimes a standard repayment and interest loan is neither beneficial or appropriate for a borrower, and alternative repayment methods might be more advisable. One such mortgage option is the part and part mortgage, which combines elements of both repayment and interest-only mortgages. In this blog, we will explore the details of a part interest part repayment mortgage, looking at what they are, how they work, and their potential advantages and disadvantages in a tough UK mortgage market.
What is a Part and Part Mortgage?
A part interest part repayment mortgage, also known as a part repayment part interest-only mortgage, is a hybrid mortgage that allows borrowers to potentially split their mortgage repayment into two parts. One part involves repaying the actual capital of the amount borrowed, essentially a regular loan repayment, where the balance of the loan is reduced on a monthly basis. While the other part covers the interest charged on the loan. This type of mortgage can offer borrowers more flexibility and control over their monthly mortgage payments.
How Does a Part Repayment Part Interest Mortgage Work?
In a part repayment part interest mortgage, borrowers have the option to choose the proportion of their mortgage that will be on an interest-only basis and the portion that will be on a repayment basis. For example, a borrower may decide to put 50% of their mortgage as interest-only and the remaining 50% as a repayment mortgage. The interest-only portion of the mortgage means that the borrower is only required to make monthly payments to cover the interest charged on the loan, rather than actually paying back the loan capital. This can potentially result in lower monthly payments compared to a full repayment mortgage, but it also means that the balance of the loan remains exactly the same.
On the other hand, the repayment portion of the mortgage requires borrowers to make monthly payments that cover both the interest charged and a portion of the loan balance. Over time, this reduces the outstanding loan amount and enables borrowers to build equity in their property. Being based in London, we have a lot of borrowers with larger mortgages purchasing more expensive properties than average, and this means that in order to feel more comfortable with the payments of their loan, many of our clients opt for this type of mortgage. At least temporarily, with the option to re-structure the loan again in the future.
Advantages of a Part Interest Part Repayment Mortgage
So why would anyone want to take this type of mortgage? If it means that you will only pay down part of your outstanding mortgage balance? Well, there are plenty of advantages to taking a part and part loan. Here are a few that our advisors can think of:
- Flexibility in Monthly Payments: One of the primary advantages of a part interest and part repayment mortgage is the flexibility it offers borrowers in managing their monthly payments. By dividing the mortgage into interest-only and repayment portions, borrowers can tailor their payments to align with their financial circumstances. This can be particularly beneficial for individuals with irregular income or those who anticipate changes in their financial situation.
- Lower Initial Payments: Opting for an interest-only portion in a part repayment part interest-only mortgage can result in lower monthly payments during the interest-only period. This can provide borrowers with more financial breathing room, especially during the early years of homeownership when expenses may be higher and disposable income is scarce!
- Potential Investment Opportunities: The lower monthly payments associated with an interest-only portion of the mortgage may allow borrowers to allocate freed-up funds towards other investments or opportunities, such as buy-to-let properties. However, it’s important to carefully consider and assess the risks and suitability of such investments.
Potential Disadvantages To Part Repayment Part Interest-Only mortgage
- End of Interest-Only Period: It’s crucial for borrowers to consider the implications of the interest-only period coming to an end. After the interest-only period, the borrower must start repaying the principal along with the interest as they still owe the money to the lender. This can significantly increase the monthly payments, so it’s important to plan and budget accordingly with the help of a qualified and experienced mortgage advisor.
- Building Equity: While the interest-only portion provides flexibility and can lower initial payments, it means that the borrower is not actively reducing the balance of the loan during this period. As a result, it may take longer to build equity in the property compared to a full repayment mortgage. This can impact future purchases and of course any investment prospects you had for the property.
- Higher Interest Rates Mean Higher Payments: Yes, we have spoken a lot about how a part interest-only part repayment loan can reduce your monthly mortgage costs. However, we are in a time where mortgage interest rates in general are quite high compared to where they were 12 months ago. And they are still continuing to rise. This means that despite reducing your payments, the more interest rates rise, the more expensive your payments will be regardless. Your mortgage advisor will be able to look into all of you options for you before applying for a mortgage and will let you know which option makes more sense financially.
- Lender Requirements and Availability: Although a popular option for a lot of people, getting part interest-only and part repayment mortgages can be quite difficult to do and may have specific eligibility criteria set by lenders. This criteria includes things like minimum deposit requirements, minimum income qualifications, and creditworthiness assessments. Some lenders will insist minimum deposit that are much higher than a standard mortgage (e.g. 50% potentially), they may also require borrowers to have much higher incomes that they normally would (e.g. some lenders may need a minimum of £100K earned income). It’s important to consult with mortgage advisors or brokers to determine the availability of part repayment part interest-only mortgage options and find a suitable lender.
Lets look at a potential example of how part interest-only and part repayment mortgages could work for someone purchasing a new home.
A couple are looking to purchase their first home. They have saved a 20% deposit and have a good credit history. After exploring various mortgage options, they decide to go for a part repayment part interest mortgage to accommodate their current financial circumstances and future plans.
The total mortgage amount they need to borrow for a mortgage is £400,000. They choose to split their mortgage into a 50/50 ratio, with 50% allocated to the interest-only portion, and the remaining 50% allocated to the repayment portion.
Interest-Only Portion: Loan amount: £200,000 Interest rate: 6% Interest-only term: 20 years
Repayment Portion: Loan amount: £200,000 Interest rate: 6% Repayment term: 20 years
During the interest-only term, the borrowers are only required to make monthly payments covering the interest charged on the £200,000 loan. Using the interest rate of 6%, their monthly payment for the interest-only portion would be:
Interest-Only Payment: £200,000 * 6% / 12 = £1,000 per month
Using a repayment term of 25 years and an interest rate of 6%, their monthly payment for the repayment portion would be:
Repayment Payment: £200,000 / (25 years * 12 months) + (6% interest) = £1,289 per month
Total: £2,289 per month
If this loan was taken entirely on a capital repayment basis, this would cost the borrowers £2,577 per month. If it was on an entirely interest-only basis it would cost the borrowers £2,000 per month.
It’s important to note that the interest rate used in this example is for illustrative purposes only. With interest rates increasing on a daily basis at the time of writing this blog, the average interest rate available could be much higher than we have used in this example. The interest rates offered by lenders can also vary based on factors other than the economic outlook of the country, including creditworthiness, loan-to-value, and other market conditions. It’s essential to speak with a mortgage advisor to obtain accurate and up-to-date information based on your specific situation.
What Is Part and Part Mortgage Criteria?
The criteria for this type of loan may vary depending on the lender and specific mortgage product. However, here are some general criteria that borrowers may need to meet to qualify:
- Deposit: Lenders typically require a minimum deposit or down payment. The specific deposit amount may vary but is often around 20% or more of the property’s purchase price.
- Creditworthiness: Lenders assess the borrower’s credit history and credit score to determine their creditworthiness. A good credit score and a positive credit history are favourable for mortgage approval in general.
- Income and Affordability: Lenders evaluate the borrower’s income to ensure they can afford the mortgage payments. They may require proof of stable income, such as payslips or tax returns. The borrower’s income should be sufficient to cover the monthly payments for both the interest-only and repayment portions of the mortgage. For these types of loan, lenders will often require the borrower to be earning more than the average income.
- Loan-to-Value Ratio (LTV): Lenders consider the loan-to-value ratio, which is the percentage of the property’s value being borrowed. Lower LTV ratios generally result in more favourable lending terms. For example, a borrower with a higher deposit (lower LTV) may receive better interest rates or have access to a wider range of part and part options.
- Property Type: Lenders may have specific criteria regarding the types of properties eligible for this type of mortgage. Some lenders may only offer these mortgages for residential properties, while others may consider certain types of investment properties as well.
It’s important to note that the criteria mentioned above are general guidelines, and actual criteria can vary between lenders. You should always discuss criteria with mortgage advisors or brokers who can provide personalised advice and assist in finding lenders that offer mortgages suitable for your specific financial situation.
Is a Part and Part Loan Right for You?
Determining whether this type of loan is suitable for your financial situation depends on various factors, including your short-term and long-term financial goals, income stability, and risk appetite. Consulting with mortgage advisors or brokers can help you evaluate your options, understand the potential benefits and risks, and make an informed decision.
A part repayment and part interest-only mortgage provides borrowers with the flexibility to divide their mortgage into interest-only and repayment portions, offering greater control over monthly payments. It can be an attractive option for those seeking lower initial payments, financial flexibility, and potential investment opportunities. However, careful consideration of the implications, such as the end of the interest-only period and building equity, is essential. As with any mortgage decision, it’s advisable to consult with professionals to ensure that a part interest part repayment mortgage aligns with your financial objectives and circumstances.
Remember, each individual’s financial situation is unique, and what may work for one person may not be suitable for another. By understanding the intricacies of part and part loans and seeking expert advice, you can make an informed decision that aligns with your homeownership goals and financial well-being.
Speak To a Mortgage Advisor
At Oportfolio Mortgages, we are experts in part interest part repayment mortgages. Over the years we have helped hundreds of borrowers to structure their home loans in ways that benefit them, and make homeownership more comfortable. In a tough mortgage market with high interest rates and expensive property costs, getting the right advice is essential.
Overstretching your borrowing and your comfortable monthly payment amount could end up backfiring and causing future issues with your finances. By speaking with a mortgage advisor, you can avoid these stresses as much as possible. Call our team today for a free initial mortgage consultation. We have appointments available over the phone, in person, and over zoom to suit you.