By this point in your search you have probably realised that choosing a mortgage means being decisive. The process seems riddled with decisions: should you choose a fixed rate or a discount? An interest-only deal or a repayment mortgage? However, things may not be as black and white as they seem. You may find that you donÂ’t have to choose between types, just how much of your mortgage you consign to each.
What do you mean?
Some lenders offer you the chance to split your mortgage loan between two or more deals. You can divide your mortgage so different portions are on different rates. Scottish Widows, for example, offers a mortgage designed to include a tracker element and a fixed rate.
The mortgage is divided into two equal chunks – one half has a fixed rate, the other is a tracker mortgage charged at 1.19 per cent above the Bank of England Base Rate. Alternatively you could divide your mortgage so that part of it is run on an interest-only basis and part as a repayment mortgage.
Is this just a way to avoid making a decision?
No. There are lots of reasons why you might want to split your mortgage between different deals and borrowers are cottoning on to the advantages of mix and match home loans. “In recent years there has been an increasing move to people taking a mortgage that is split between interest-only and capital repayment,” says Richard Brown, chief executive of online broker Moneynet.co.uk. “This has been hastened by the decline in popularity of endowment mortgages due to the reduced returns made by life companies and the potential shortfall many policyholders are faced with.”
Existing borrowers looking to remortgage away from an interest-only deal backed by an endowment can benefit from a split. Gordon Bowden, business development director at Scottish Widows, explains: “Many don’t want to give up the endowment they have been paying into for years. If someone has a £50,000 mortgage, but now wants to borrow £150,000, they could retain the £50,000 as an interest-only mortgage and borrow the rest as capital and interest.” If your endowment won’t cover the amount you intended, you could adjust your mortgage so that the amount taken as interest-only is the amount your endowment is on track to make. So even if you don’t want to borrow more money you can mix and match repayment and interest-only to cover a shortfall.
So mixing and matching is good for remortgagors, but what can first-time buyers get out of it?
Recent stock market falls may have put you off a full interest-only deal. But if you think a recovery may be around the corner splitting your mortgage between interest-only and repayment elements can be a good way to hedge your bets. A split gives you the opportunity to make some money if you choose the right investment vehicle, but limits your exposure to the stock market.
And it allows you to cut your monthly costs. Imagine you take out Monmouthshire Building SocietyÂ’s stepped discount mortgage, starting at 2.59 per cent. You borrow £120,000 to buy a property costing £150,000 on a repayment basis – the initial monthly payments would be £548.36. Splitting the mortgage so that 50 per cent is on a repayment deal and 50 per cent is interest-only reduces the monthly repayment to £403.68 – a difference of £144.68. You would need to make payments into an investment vehicle, but your outgoings should still be reduced. And if your investment outperforms expectations you could have a lump sum to look forward to.
What about mixing rates – how can that help me?
Dividing your mortgage in this way can also help you limit your exposure to interest rate rises. For instance you may think rates are likely to stay low and decide to take advantage of a discount mortgage. If, however, you are on a limited budget you may be aware that you could have problems should rates rise. Splitting your loan could help you get the best of both worlds. “The market is so volatile at the moment. Some experts are predicting a rate rise, others are not,” says Gordon Bowden. “If you fix a proportion, you know you’ll be paying a certain amount whatever happens.” The rest could be run as a discount loan so you get the benefits of the current low interest rates.
Alternatively you could mix two different fixed rates, says a spokesman for Standard Life Bank. Customers of the bank can split their loans between, say, a one-year fixed rate and a five-year fix in any proportion they want. You can have long-term security while taking advantage of the lower interest rates attached to the short-term fixes. As well as allowing you to limit the level your repayments could rise to, mixing can give flexibility and choice.
What do you mean?
Choosing different mortgages can give you access to deals you might not normally qualify for. Jennifer Holloway, spokeswoman for Skipton Building Society, explains: “Say there is a tracker deal with a maximum loan of £150,000 and someone wants to borrow £200,000 – they might really want the tracker so they could take the rest on a different deal.” Skipton, like other lenders that offer mix and match mortgages, has no restrictions on the proportions held on each deal. However, each part must match the criteria for the loan that has been chosen, so if you do want to fix just a small part of your loan, it will have to be enough to clear the lenderÂ’s minimum loan amount.
What are the downsides?
You could end up paying higher charges than if you choose just one deal. If you take out a mortgage with an arrangement fee you will pay the full amount even if only half your loan is on the product. And if you take out two fixed rates you will pay the fee on each. Another potential problem is that part of your mortgage may run out of its offer period while the other half is locked in with redemption penalties. If you wanted to move to a new lender you would have to wait until the end of both offers, or pay the penalty.
Which lenders will allow mix and match deals?
Many lenders offer a repayment/interest-only mix, but not all offer a blend of rates. Scottish Widows, Standard Life Bank, Halifax and Skipton Building Society all allow mix and match mortgages, with Skipton allowing loans to be distributed among up to four different deals. Halifax has restrictions on mix and match loans. A spokeswoman explains: “Both deals must have the same variable base rate and the interest calculated at the same time, either daily or annually.” The bank’s special first-time buyer deals cannot be taken on a part-and-part basis, but otherwise there is a choice of loans
