Could a part-and-part mortgage help you on to the property ladder?
Part-and-part mortgages could become more popular as part of a regulatory review of mortgage lending rules.
The Financial Conduct Authority is considering an overhaul of the rules to boost lending to underserved groups such as first-time buyers and the self-employed.
The City watchdog said in its review that respondents suggested part interest‑only and part repayment mortgages could help consumers “access homeownership earlier”.
These part-and-part mortgages can provide a “unique solution” for borrowers, said Ascot Mortgages, by giving payment flexibility and a way to “gradually reduce mortgage capital”.
What is a part-and-part mortgage?
There are two main types of mortgage. With a “repayment” loan, borrowers pay off the amount borrowed and any interest. An “interest-only” mortgage involves only the interest being paid off each month and a lump sum is owed to cover the remaining capital at the end of the loan term.
A part-and-part mortgage provides a third option that combines both, said Unbiased, “where you pay off some of your mortgage but not the whole amount”.
Through this mix, mortgage payers secure lower monthly repayments, “while still ensuring the property is yours at the end of the term”, said Clifton Private Finance.
How do they work?
A part-and-part mortgage can “significantly reduce your monthly repayments”, said Tembo Mortgages.
The application process is the same as applying for a repayment or interest-only mortgage, but it helps those “looking for lower monthly payments without resorting to a longer mortgage term”, said Unbiased.
You will need to discuss how much of your mortgage you plan to pay off each month, and the lump sum you will need to clear under the interest-only portion at the end of the term.
For example, a £200,000 repayment mortgage at 5% over a 30-year term would cost £1,074 per month. But if you take £50,000 as an interest-only loan, the monthly repayment would drop to £1,014. This doesn’t appear like a huge cut in monthly costs, but it can snowball over time.
Pros and cons
The main benefit of a part-and-part mortgage is that your monthly repayment will be lower, said The Telegraph, which can be “helpful if you’re on a strict budget”.
The loans are also flexible, so you can make overpayments “if you can afford to”. Affordability will also be boosted as you won’t owe as much initially.
However, there are downsides, as lenders may have limits on how much of your mortgage can be interest-only, said Unbiased. Plus, you still need a plan to repay the interest-only portion at the end of the term, said Mortgageable, “otherwise financial pressures could simply be delayed”.