How ‘splitting’ your mortgage could cut payments by hundreds – and whether to do it

With mortgage rates at high levels, many households are looking for ways to cut their monthly bills.

One method, which mortgage brokers say more borrowers are asking about, is sometimes known as “mortgage splitting”.

It involves taking out one home loan, but in multiple parts.

In the most common form, one section of the mortgage is a repayment deal, where you pay down interest and the capital you owe.

But the second part is interest-only. The borrower does not repay the capital at all.

The technique isn’t new, but experts say with rates so high and budgets stretched, an increasing number of families are considering it.

So how does it work, and is it a good idea?

How does mortgage splitting work?

The easiest way to explain mortgage splitting is with an example.

Let’s say you buy a £400,000 house with a £100,000 deposit. You take out a 30-year repayment mortgage for £300,000 at a rate of 4.5 per cent. You’ll repay £1,519 per month.

But if you split that mortgage in half – 50 per cent on repayment, 50 per cent interest-only – you’d pay £760 on the repayment half and £562 on the interest-only part, assuming the rate is the same on both parts.

In total, that’s £1,322. A saving of nearly £200 per month.

Of course, there are caveats.

“The key point is that this is a monthly payment saving, not a debt saving. The borrower would still owe the £150,000 interest-only balance at the end of the term,” explained Nick Mendes, mortgage technical manager at John Charcol brokers.

With a repayment mortgage, you are paying the interest you owe to the lender, and the capital, so at the end of the 30-year term, you own your home and don’t owe any money to anyone.

With an interest-only mortgage, you aren’t paying down the balance, so at the end of the term, you will still owe the full initial loan amount, which you’ll have to pay off using things like savings or selling the property.

With part and part, you have a halfway house situation. Depending on how you split your mortgage – it doesn’t have to be 50-50 – you will have paid down some of the capital, but will still owe some money.

“Moving part of the borrowing onto interest-only can reduce the monthly payment, so it can look attractive when budgets are stretched. The issue is that it does not make the debt disappear. It just changes how and when part of it is repaid,” explains Mendes.

Why are more households asking about it now?

“Part and part is not new, but it is something borrowers are asking about more now that monthly payments are higher,” Mendes says.

Some borrowers who bought their homes during times of low interest rates may now be refinancing onto much more expensive deals, and finding ways to cut costs.

Five years ago, the average fixed mortgage rate was below 3 per cent according to financial data firm Moneyfacts, but after a recent uptick following the start of the conflict in the Middle East, rates are now above 5.5 per cent.

Complete interest-only deals are also harder to get now.

New rules in 2014 mean that interest-only mortgage customers must prove they are relying on more than just rising house prices to repay a home loan.

“Lots of people were coming to the end of their mortgage term with no way of paying it back, or having little equity to downsize,” says Elliott Culley, director at Switch Mortgage Finance.

“So most now cap the overall loan-to-value [the size of a mortgage compared to the price of the home] and want a minimum equity in the property. It reduces the number of interest-only mortgages they take on,” he explains.

Mike Perrin, property finance specialist at MSP Financial Solutions, added: “Having part and part enables borrowers to have a guarantee that part of their mortgage is repaid and use another asset or sale and downside to repay the interest-only element.”

Who could use it?

Getting a part and part mortgage still requires some documentation.

Mendes explains: “Lenders will want to understand the repayment plan for the interest-only element. That could be savings, investments, a pension lump sum, downsizing, the sale of another property, or another credible route, but the lender must be comfortable that it is realistic.

“They will usually want evidence rather than just an intention and criteria varies quite a lot between lenders. Some are comfortable with part-and-part, some will only allow it in certain circumstances, and others will not offer it at all.”

Mendes says it works best for those with a “clear reason” to use it and an “exit strategy.”

“Someone with bonuses, investments, pension planning, or another asset they expect to use later may be in a stronger position than someone simply using interest-only because the full repayment mortgage feels unaffordable today. That is the part lenders will be wary of,” he explains.

But there are warnings that you may want to check periodically to ensure it’s still the right option.

“It is easy to forget or get used to a temporary measure if you do not at least review your options with a qualified broker each time you come to remortgage,” says Andrew Montlake, of Coreco brokers.

Are there other ways to split a mortgage?

As well as splitting a mortgage across interest-only and repayment, you can split your loan in other ways too.

One method is via splitting lending across fixed and variable mortgage rates.

Fixed mortgages – by far the most common type – have risen in price in recent months because the crisis in Iran has sent expectations of inflation higher.

Top rates are now well above 4 per cent – even for those with large deposits.

They have risen even though the Bank of England (BoE) base rate has stayed at 3.75 per cent – because rates are heavily based on swaps, which go up or down based on the future risk of the BoE upping or cutting the base rate.

Another type of mortgage – the tracker – has stayed far cheaper, with some even below 4 per cent.

These mortgages are variable, and follow the BoE’s base rate, so if they go up, you could pay more, but if they don’t, you could pay less than you do with a fixed rate.

These trackers also often allow early exit fees or allow you to overpay large amounts, which fixes commonly don’t.

One halfway house option is getting a split mortgage between a tracker and a fix.

Perrin says: “Split products are great for those who don’t want to risk full exposure to variable rates or want the flexibility to pay down more than a fixed rate will allow.”

There are warnings about these, too, though, as it can, of course, add complexity.

“You need to understand what happens when each part comes up for renewal, whether different fees apply, and how flexible the lender is if you want to change the structure later,” says Mendes.