The vast majority of mortgages are either repayment or interest-only. But there is a third lesser known method, the “part-and-part” mortgage.
Here your mortgage combines two repayment methods. The mortgage is therefore “part” repayment and “part” interest-only.
What is a part and part mortgage?
With a part and part mortgage you will be splitting the repayment of your debt between repayment (capital & interest) and interest only.
With the repayment portion the debt will gradually reduce but the interest only part stays the same. When the mortgage ends, there will still be a debt to pay off.
What are the benefits of a part and part mortgage?
They are slightly cheaper each month when compared to a similar repayment mortgage.
They can also be more flexible with the eventual repayment of the interest only part made from overpayments, maturing investments etc.
How does a part and part mortgage work?
When applying for a mortgage you will ask the lender to split the loan into 2 separate parts:
- The repayment part
- The interest only part
There’s no definitive way to how these are set up or proportioned. It will be down to what suits you best, along with the lender’s agreement.
It’s fair to say that most lenders would prefer the majority of the loan to be on a repayment basis.
The chart below shows how the mortgage balance changes each year.
Repaying the interest-only part
You need to have a repayment plan or strategy for the interest only component of the loan as this balance will not be reducing.
Unfortunately, “I will win the lottery” won’t be a plan that the lender will agree to.
The lenders will want quite a few details about your plan so that you are not committing to a mortgage that you will be unable to pay back when the term ends.
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