Mix and match mortgages

One of our cases that completed last week was part interest-only and part-capital repayment and such splits are likely to become more popular in the future. This approach could be useful for those wishing to keep their payments down and who have a strategy to repay the interest-only element. However, not all lenders offer this and there are usually minimum income or equity requirements to qualify. Revising the rules and criteria on interest-only mortgages could be a quick win in the current economic environment, especially for low loan-to-value properties. The maturity of the lifetime mortgage market should help address the risk that the loan is not settled by maturity. I expect we will see more innovation in the mortgage market in the next 10 weeks than we have in the past 10 years. It is understandable that lenders want to sit on their hands during turbulent times but 2023 is not looking great for them at the moment.

While mix and match interest-only/repayment mortgages are possible, there are only a limited number of lenders who will consider this option, with the biggest limitation being the repayment strategy for the interest-only portion of the mortgage. This method is more often seen when people want to take out additional borrowing, such as for a second charge on their home. Just as with full interest-only mortgages, lenders' criteria are much more stringent when going down this route and, as with many things, if you have better affordability then this option could work for you. We have helped a couple of high net worths use this approach recently but it's much harder to do for clients with average incomes. If people choose to mix and match, they will often pay more in interest payments over time. However, some lenders do allow you to change your interest-only mortgage to repayment for a minimal fee. We don't often see clients actively want part variable/part fixed mortgages but it's certainly something that can be achieved. What we have seen is clients wanting to fix a portion of their mortgage for five years and the reminder for a shorter period, often two years. However, when we talk through the costs of this many borrowers opt for one or the other. This often happens when people are expecting to be able to pay off part of the mortgage sooner but with the ability to overpay usually an option with fixed mortgages, the savings don't always stack up. Given that lenders are becoming stricter with their affordability assessments, we need to see more flexibility from them to allow the market to continue to function. For example, they could allow for much longer terms that take people well into their retirement, since we are all likely to work for longer these days.

Clients are certainly considering their repayment strategy more than ever right now. Choosing the right option can be tricky as you're relying on guessing future interest rates and matching predictions with client circumstances. I've had many clients who have multiple parts to their mortgage where they may have extended in the past. Over the past few months many of these clients have gone onto a discount mortgage rather than a fixed deal because the initial rate was so much lower. They also have the certainly of the other parts of their mortgage being fixed. This allows them to hedge the risk that interest rates won't top out much higher than the fixed rate offered, and that they won't stay high for too long. It's expected that interest rates will continue to rise until the spring and then gently head back down as inflation retreats and the economy retracts. Those that have capacity within their budget are choosing to gamble that the next 3-6 months of increasing mortgage rates will be mirrored by falling rates once the Bank of England catches up with the real economy and that the next time their mortgage deal comes up for refinancing they can fix at a much more palatable rate.

Part and part mortgages have always been available, but just like the increase in demand we are seeing for tracker mortgages, we should expect to see an increase in these type of mortgages in the future. Many people have taken themselves to maximum lending over the past couple of years with record breaking affordability and rates aiding them. Sadly, many of these customers have left themselves wide open to payment shock, namely a sharp and sudden increase to their monthly mortgage payments. For many homeowners, this will be completely unaffordable, but being able to switch part of your mortgage to interest only will immediately ease the burden. However, you must be aware that you are not paying off your mortgage in full and should you be unable to repay the mortgage at the end of your term, your property may be repossessed. I think we are now seeing a big housing market reset, with many clients requirements appearing to be very similar to the pre-global economic crisis era. The important thing for any homeowner with a mortgage to do at the moment is to seek impartial advice. If you are not speaking to a broker then you are asking for trouble.