Most borrowers choose between one of two traditional mortgage repayment methods: interest only or capital repayment. There is a lesser-known third option called a part repayment and part interest mortgage (known as ‘part and part mortgages’). A part repayment and part interest mortgage is seen as the middle ground and results in lower monthly payments compared to a typical repayment mortgage.
To qualify for a part and part mortgage, lenders assess affordability in the usual way, but they may have stricter criteria. In addition, they will require proof of a repayment vehicle for the remainder of the mortgage debt at the end of the term, e.g. the sale of the property.
In this article, I’ll describe how a part and part mortgage works in more detail. For personalised advice on your next mortgage, please contact Goldmanread. We can help you find and secure the right mortgage to fit your personal circumstances and goals.
What is a part repayment, part interest only mortgage (i.e. a part and part mortgage)?
As the name suggests, a part and part mortgage is made up of two parts; one part of the loan is repaid on a repayment basis (i.e. loan capital + interest), and the other part is on an interest-only basis.
Therefore, you agree to pay back only a portion of the loan capital over the mortgage term, and the remaining balance is due in a lump sum at the end.
How do part interest, part repayment mortgages work?
In a part and part mortgage, the monthly mortgage repayments are made up of capital + interest on the repayment part of the loan and interest only on the rest.
The interest-only part of the loan is capped by most lenders, in line with the loan-to-value ratio, typically at 50%. So, in theory, it’s possible to get a half-interest, half-repayment mortgage, although you will likely have to use a mortgage broker to approach a specialist lender.
In order to qualify for a part interest, part repayment mortgage, the borrower has to prove they have a solid repayment plan to satisfy the lender, which typically includes:
- Sale of the mortgaged property
- Sale of second property, e.g. a buy-to-let property
- Pension lump sum
- ISA or other investment plan
The types of repayment methods or plans which are unacceptable typically include:
- An expected inheritance
- Sale of a business
- Tax refunds
How are your monthly payments calculated?
Let’s look at an example of how monthly mortgage payments are calculated on a part and part mortgage:
You borrow £300,000, £250,000 of which is the repayment part, and £50,000 of which is the interest-only part of the loan. The mortgage term is 30 years, and the interest rate is 5%. Your monthly repayments look like this:
- Interest-Only Part:£50,000 × 5% ÷ 12 ≈ £208.33
- Repayment Part:Using a mortgage calculator, the monthly repayment for a £250,000 loan over 30 years at 5% interest is approximately £1,338.22.
- Total Monthly Payment:£208.33 + £1,338.22 ≈ £1,546.55.
In comparison, if you borrowed £300,000 over 30 years on a repayment only mortgage, the monthly payments would be £1,610.46. While this does mean higher monthly repayments than a part and part mortgage, the loan would be paid off in full at the end of the term, offering the borrower a degree of security.
On an interest-only mortgage, the monthly repayments would be £1,250, but of course, £300,000 would be due in full at the end of the term.
To learn more about interest-only mortgages, check out our blog here.
Are part-interest, part-repayment mortgages suitable for everyone?
A part and part mortgage is certainly not suitable for all borrowers. It is important to remember that although the monthly payments might be lower compared to a full repayment mortgage, the borrower is not actually paying back the capital on part of the mortgage.
While it offers flexibility with lower initial payments through the interest-only portion, it requires a solid repayment strategy for the capital part.
This type of mortgage may suit borrowers with fluctuating incomes, investment plans, or short-term ownership goals. However, it’s not ideal for those seeking long-term stability or unable to commit to a repayment plan.
It’s crucial for borrowers to carefully assess their needs and consult a mortgage broker before committing to this type of mortgage.
Advantages of a part and part mortgage
1) Lower monthly payments
As part of the mortgage is being paid on an interest-only arrangement, it means that the monthly repayments are less than a full capital repayment mortgage.
2) Flexibility
Although the borrower commits to pay interest only on a part of the mortgage, most lenders will allow overpayments. In this case the borrower decides how much they pay off of the mortgage and when.
3) Early repayment potential
In theory, if the borrower’s repayment vehicle grows faster than expected, e.g. an investment plan generates a greater return, the mortgage could be repaid early.
4) Investment Opportunity
Borrowers may choose to invest the savings from lower initial payments into other investments with potentially higher returns, taking advantage of the time value of money.
5) Higher Loan-to-Value Ratio
Part and part mortgages may allow borrowers to access a higher loan-to-value ratio compared to traditional fixed-rate mortgages, improving their borrowing power.
Disadvantages of part and part mortgages
1) Risk of investment failure
If the repayment plan relies on investments that go on to underperform, the borrower will have to find the funds to settle the outstanding debt, which may mean selling their home.
2) Higher overall cost
As the borrower is only repaying part of the debt on the mortgage, the overall mortgage cost will likely be more expensive than a mortgage on a purely repayment basis.
3) May inspire a lack of discipline
Part-and-part mortgage borrowers sometimes get into bad habits regarding their lower monthly repayments too. They can get used to the lower monthly payments and are unwilling to increase the payments as their income increases.
4) Risk of Negative Equity
If property values decline or fail to appreciate as expected, borrowers may face the risk of negative equity, where the outstanding mortgage balance exceeds the value of the property.
5) Future Payment Shock
Should the borrower move to a repayment mortgage when the part and part deal comes to an end, they are likely to experience a significant increase in monthly payments, which could be a shock if they are not sufficiently planned for.
How can I get a part-interest, part-repayment mortgage?
Not all high street lenders offer this kind of mortgage structure due to the higher risk involved, so it’s important to know which lenders to approach. That’s where the help of an experienced mortgage broker can be very valuable.
Some lenders insist on minimum income levels for part repayment, part interest-only mortgages. In addition, where the repayment vehicle is the eventual sale of the property, most lenders have a minimum equity requirement, which will depend on where the property is located but can be relatively high.
Get in touch with Goldmanread
When considering a part and part mortgage, it’s important to get professional advice from a mortgage broker. At Goldmanread, our mortgage brokers have been advising interest-only borrowers for many years. Our extensive knowledge of the mortgage market means we know which lenders offer this type of mortgage and what their requirements are.
We will carry out a thorough mortgage consultation to assess your needs, goals and financial situation before making our recommendations. As a whole-of-market mortgage broker, we have access to deals from both high-street and specialist lenders. Once a suitable lender has been identified, we will take on the entire mortgage application on your behalf and be on hand throughout the process to answer your questions and ensure it goes smoothly.
Get in touch today for mortgage advice and to arrange a consultation.
Frequently asked questions about part and part mortgages
What is the difference between a part and part mortgage and an interest-only mortgage?
An interest-only mortgage is just that – you pay interest every month and pay the loan capital off in full at the end of the mortgage term. In a part-and-part mortgage, only part of the loan is paid as interest-only; the other part is paid on a repayment basis.
While this results in higher monthly payments compared to an interest-only home loan, at least part of the loan is repaid in full at the end of the term, offering a degree of security.
What happens if I can’t make the capital repayment at the end of the mortgage term?
The main condition of part and part mortgages is that the outstanding debt will be repaid in full at the end of the term. If you are unable to settle the debt, the lender will likely expect you to sell your home to repay the loan.
