How Just Mortgage Brokers Can Help You
There are two main types of mortgage available to people buying a property. These are repayment or capital and interest mortgages – where the monthly payments are calculated to fully pay off the amount borrowed by the end of the agreed term – and interest-only mortgages, where your monthly payment only covers the accruing interest on the loan, and the outstanding balance, or “capital”, remains the same over the mortgage term.
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Although interest-only mortgages have lower monthly payment than a comparable repayment mortgage, you will usually also have to make parallel payments into a “repayment vehicle” – such as an ISA or other investment plan – which will provide you with the lump sum needed to pay off the total outstanding balance at the end of the mortgage term.
While the vast majority of mortgages are either repayment or interest-only, there is a third type, known as a “part-and-part” mortgage. This type of mortgage effectively combines the other two kinds, splitting the total mortgage balance between a repayment element and an interest-only element. The mortgage is, therefore, “part” repayment and “part” interest-only.
As a simple example, imagine a £200,000 mortgage, with £120,000 on a repayment basis and £80,000 on interest-only. Over the term of your mortgage, your monthly payments will cover the interest accruing on the entire outstanding debt, but will only be paying back the segment of the mortgage which is on a repayment basis. By the end of the agreed term the repayment element (£120,000) will be fully paid off, and the interest-only element (£80,000) will still be owed at the end of the mortgage term.
Why choose a part-and-part mortgage?
For some, part-and-part mortgages represent an attractive compromise between repayment and interest-only mortgages. The monthly payments are lower than would be the case for a full repayment mortgage, while the total interest charged over the mortgage term is less than it would be on an equivalent interest-only mortgage.
Part-and-part mortgages can be particularly advantageous for those who have a repayment vehicle or investment plan that they know (or suspect) may not pay out enough to clear the whole mortgage balance at the end of the agreed term. In recent years this has been the case for some borrowers who took out endowment policies, which were popularly sold as mortgage repayment vehicles in the 1980s and early 1990s, but which in many cases haven’t performed as expected and have since been projected to pay out a lower amount on maturity.
In cases where your repayment vehicle is likely to pay out less than the amount you have borrowed (or that you want to borrow), part-and-part mortgages could make a lot of sense – you simply set up the interest-only amount to cover the lump sum balance you expect to receive from your repayment vehicle, and have the remainder of the mortgage on a repayment basis, to be paid off over the agreed mortgage term.
Applying for a part-and-part mortgage
Part-and-part mortgages aren’t for everyone; the need for a repayment vehicle for the interest-only part can not be stressed highly enough, and it’s also the case that not all lenders are willing to offer this kind of split mortgage. However, for some people they represent an ideal solution to their borrowing needs.
Whether you are buying a new home or looking at remortgaging for a better mortgage deal, contact us today to discuss with an impartial, qualified mortgage adviser whether a part-and-part mortgage might be suitable for you.