Part and Part Mortgage Repayment | UK Mortgage 2023

Episode: Part Capital, Part Interest Mortgages

Introduction

Host: Hi there! Welcome back to another episode of Let’s Talk About Mortgages. Today, we’ll be demystifying the topic of Part Interest and Part Capital mortgages — or is it Part Capital, Part Interest? Stay tuned to find out.

Joining me today is IFA Ifthikar Mohammad, a mortgage advisor and accountant with over 10 years of experience — the best of both worlds.

The Current Mortgage Market

Host: As a homeowner whose mortgage interest rate has gone up to around 5.5%–6%, my monthly payments have increased by £600–£700. Almost 60% of my salary now goes toward my mortgage, making it difficult to manage with all the other expenses amidst the cost of living crisis. So, Ify, what’s happening in the market right now?

Ifthi: Good question. The market has changed significantly over the past few years. Interest rates have risen sharply — people had been living in a “bubble” of 1–2% rates for a long time. Now that rates are at 5–6%, many are finding it hard to adjust.

People are exploring options:

• Extending their mortgage terms
• Switching to interest-only
• Or considering Part Interest, Part Capital mortgages

This last one can be a good option for some, though not for everyone.

What Is a Part Interest, Part Capital Mortgage?

Host: When I hear “Part Interest, Part Capital,” I think — I’m already paying both interest and capital every month. How is this different from a regular mortgage?

Ifthi: Good question.

Regular Repayment Mortgage: You borrow, say, £200,000 and repay both interest and capital over 25–30 years. At the end, the loan balance becomes £0.

Interest-Only Mortgage: You borrow £200,000, but only pay the interest each month. After 25 years, you still owe the full £200,000.

Part Interest, Part Capital Mortgage: A mix of both. For example:

• £100,000 is on a repayment basis (interest + capital) — this part reduces to £0 over time.
• £100,000 is interest-only — this balance remains at £100,000 after 25 years.

That’s the difference.

Eligibility Criteria

Host: Am I eligible for this mortgage type? I’d do anything to reduce my monthly payment right now.

Ifthi: Not everyone is eligible. Banks are cautious because of past issues with interest-only loans.

To qualify, you’ll generally need:

• A Large Deposit – Typically 25% or more, or sometimes a minimum deposit amount like £250,000–£300,000, depending on the lender.
• A Repayment Vehicle – Proof of how you’ll repay the remaining balance (e.g., £100,000) at the end of the term.

Not all banks offer this product, but some major lenders do.

Can I Convert My Existing Mortgage to Part and Part?

Host: I’m currently on a residential repayment mortgage. Can I speak to my lender to convert it to Part and Part?

Ifthi: Yes, you can try. If your lender offers it and you meet their criteria, they may allow it.

If not, you can approach other lenders. A mortgage broker can help identify which banks offer such products, as brokers deal with multiple lenders and understand each one’s policies.

Understanding Repayment Vehicles

Host: When you say “repayment vehicle,” it reminds me of cars! Can I offer my car as a repayment vehicle?

Ifthi: Probably not. A repayment vehicle simply means how you plan to repay the outstanding loan at the end of the term.

Acceptable Repayment Vehicles:

• Pension Schemes: A common and reliable option. The pension pot builds up and is secure.
• Buy-to-Let Properties: Equity in other properties can be used.
• Investment ISAs, Bonds, or Unit Trusts: Some banks accept these, depending on their risk appetite.

Unacceptable Repayment Vehicles:

• Cars – Depreciating assets.
• Cash – Too easily accessible.
• Gold or Cryptocurrency – Highly liquid and volatile.
• Bonuses – Not guaranteed or consistent income.

Banks prefer long-term, less liquid assets that hold or increase in value.

Pros of a Part Interest, Part Capital Mortgage

Ifthi: Let’s look at the advantages:

• Lower Monthly Payments: Since part of your loan is interest-only, monthly payments are lower than full repayment mortgages.
• Cash Flow Flexibility: You can overpay when your finances allow. For example, if your full repayment would be £2,000, a Part and Part might be £1,500 — giving you flexibility.
• Better Than Full Interest-Only: At least part of your loan is reducing, meaning you’ll owe less at the end.
• Less Interest Over Time: Since one portion of the loan decreases, you pay less interest overall compared to full interest-only loans.

Cons of a Part Interest, Part Capital Mortgage

Ifthi: Now, the disadvantages:

• Large Balance at the End: You’ll still owe a significant amount (e.g., £100,000) after 25 years.
• Higher Long-Term Interest Costs: Because part of the loan remains constant, you pay interest on it for the full term.
• Limited Lender Availability: Not all banks offer this option, and those that do impose strict criteria.
• Repayment Vehicle Risks: If your chosen repayment vehicle (like a Buy-to-Let property) is sold or loses value, you may be left without a way to repay the balance.
• Not Suitable for Everyone: This type of mortgage requires careful financial management. It’s not ideal for those who struggle to manage money or plan long-term. Always seek professional advice first.

Alternatives to Part and Part Mortgages

Host: Are there other ways to reduce my monthly payments?

Ifthi: Yes, there are alternatives:

• Extend the Mortgage Term: Increasing your term from 25 years to 30 or 35 years reduces monthly payments without leaving a balance at the end.
• Government Mortgage Charter: A temporary scheme offering relief options, such as short-term interest-only payments, for those struggling during the current crisis.

These are safer, more conventional alternatives if Part and Part doesn’t suit your situation.

Key Takeaways

Host: Here’s what we’ve learned today:

• Eligibility: You must meet strict lender criteria and have an acceptable repayment vehicle.
• Repayment Vehicle: Must be an asset that grows in value — not cash, cars, or bonuses.
• Long-Term Impact: You’ll pay more interest overall and have a balance to repay at the end unless you switch the interest-only portion to repayment.
• Alternatives Exist: Extending your mortgage term or exploring the Mortgage Charter may provide temporary relief.

Closing

Host: Thank you, Ify, for clearly explaining Part Capital, Part Interest Mortgages and the available options for homeowners.

And thank you all for watching! If you found this episode useful:

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We’ll see you in another episode of Let’s Talk About Mortgages with a new topic. Until then — see you next time.