What is a part and part mortgage?
Part and part mortgages are a model that combines the two most common methods of repaying a mortgage: repayment and interest only. With a repayment mortgage, the monthly sum you pay covers both the interest and a certain percentage of the capital involved, so when the loan period ends you will have paid it off in full. With an interest-only mortgage, you pay off just the interest accrued, but not the loan capital. When you combine the two in a part and part mortgage, you choose what percentage of the loan will be repaid under each type – in most cases, it will be around 80% repayment and 20% interest-only.
As an example, picture a mortgage of £200,000 where £160,000 is designated as repayment and the remaining £40,000 is interest-only. Throughout the mortgage term, monthly payments will incorporate the interest accrued plus the portion of the mortgage that is repayment-based. When the mortgage term reaches its end, the repayment segment will be paid off, and the interest-only segment (£40,000) will need to be paid.
What are the advantages of a part and part mortgage?
Though an interest-only mortgage has lower monthly payments, in reality, you will usually be required to make parallel payments into an investment plan or ISA as a ‘repayment vehicle’. This is designed to build up the lump sum that will pay off the balance at the end of the mortgage term. This is not an ideal arrangement for many, and a part and part mortgage can be an appealing compromise between interest-only and repayment mortgages.
Payments each month will be lower than with a repayment mortgage, but the overall interest accrued will be lower than if it were an interest-only mortgage. A part and part mortgage can be a great resource for people with a repayment vehicle in place that they suspect might fail to pay out enough for an entirely interest-only mortgage. There have been various examples of people who took out an endowment policy in the 1980s and ’90s which didn’t perform to expectations.
In any case, where a repayment vehicle is unlikely to yield as much as you aim to borrow, a part and part mortgage could be a good solution. Simply designate the interest-only portion based on the sum you expect to your repayment vehicle to yield once matured. The rest of your mortgage can then be taken in a repayment format, which you will pay off over the mortgage term.
What repayment plans are available for part and part mortgages?
Your repayment vehicle will need to be established before you apply for a part and part mortgage, as with an interest-only mortgage. There are various accepted vehicles, but you will need to provide adequate proof that your chosen method is reliable. Accepted repayment vehicles include:
- Selling a second property
- Endowment policies
- Stocks and shares
- Stocks and shares ISAs
- Investment bonds
What if I have bad credit?
For a part and part mortgage, lenders must be confident that you can keep up with payments throughout the mortgage term. A bad credit record will not be looked upon favourably by most lenders, but there are lenders out there who will consider applicants with all types of credit issues. You may find that the number of options available to you is limited, and the rates offered are less competitive, but you are not entirely without hope just because your credit record isn’t flawless.
It’s helpful to seek the support of an expert mortgage adviser to assist with identifying the right lender for a part and part mortgage if you have bad credit.
How do I apply for a part and part mortgage?
Part and part mortgages won’t be right for every applicant. They simply cannot be secured without a rock-solid repayment vehicle to cover the interest-only portion, and many lenders will not even offer this split mortgage type. But for some, a part and part mortgage is the ideal option for their circumstances.
Whether you plan to purchase a new home or remortgage to improve your deal, your best option is to get in touch with Think Plutus and speak to one of our impartial, expert mortgage advisers. We can tell you if a part and part mortgage would be a good option for you, and get you started on the application process.