Can’t decide whether to fix your mortgage or go onto a variable rate? It turns out you can do both.
A number of major lenders including Barclays and HSBC allow customers to take out a home loan known as a ‘half and half’ where one portion is tied to a fixed rate and the other is on a variable, such as a tracker.
However, these options are often only available via a broker who will be able to see the option as part of a lender’s lending criteria.
Could splitting your mortgage in to two loans help you to manage rising interest rates and even pay off your mortgage sooner?
Others to offer the hybrid are TSB and Clydesdale. NatWest provides the option but only for existing customers.
The option could be handy for the 1.4million people who need to remortgage by the end of this year and are reticent to lock into a fixed rate in the hope that they fall over the next couple of years.
Currently the average two-year fixed rate is 6.52 per cent according to Moneyfacts and the average five-year rate has also crashed through the 6 per cent mark as interest on home loans continues to rise.
The average tracker rate is 5.98 per cent, according to Moneyfacts.
What is a half and half mortgage?
A half and half mortgage – also known as a part mortgage – is when you divide up the total home loan into two loans with separate features.
Having two smaller loans instead of one larger one won’t impact your credit score but it does not isolate you from the impacts of falling in to arrears.
Nicholas Mendes, mortgages technical manager at John Charcoal, says: ‘Lenders will assess affordability based on the client income overall to ensure serviceability and avoid the mortgage holder going into arrears.
‘But, if you fall in to arrears on one part of the loan as the lenders holds a charge over the security they can still reposes.’
A spokesman for HSBC confirmed that under the bank’s system the two loans do not have to be equal as a 50/50 per cent split, it could be any other division, for example 40 per cent and 60 per cent, or 80 per cent and 20 per cent.
What are the benefits of a half and half mortgage?
So, if you wanted to take out a two-year fixed rate but hedge yourself in case rates fall during that time you could put half of your loan on to a tracker rate.
Paul Welch, founder and chief executive at Large Mortgage Loans, said: ‘If you can’t decide between fixed or variable rate, some lenders will allow you to do both, known as a half and half mortgage.
‘So, you would assign a chunk of your mortgage to a fixed rate deal whilst paying the remainder on a variable rate, giving you a bit more security should rates rise but also providing you with the flexibility of not being tied into a potentially expensive fixed rate, should rates fall.’
The option also has a use for those looking to overpay on their mortgage and can take advantage of tracker rates which are usually free from early repayment charges.
Putting part of your mortgage on to a tracker and part on to a fixed rate could help insulate you against further interest rate rises.
Mendes, adds, ‘Some people promote this as a way of hedging your bets but I think it is particularly useful if someone wants the ability to overpay more than 10/20 per cent a year by having part of the mortgage on an ERC free tracker.’
In the current environment, and with many mortgage holders looking to clear debt quickly, this is a useful option to have the best of both worlds and not be penalised if you plan to make significant overpayment to reduce the debt.
The option could also be useful for those looking to looking to port the loan.
Rather than have one part of the mortgage on a fixed rate and any additional borrowing on another fixed rate, leaving the two parts out of sync.
By having an additional borrowing on a tracker with no early repayment charges means when the existing fixed rate comes to an end you can then refinance without incurring any penalty to clear the second part to the loan if this was on a fixed.
Half and half options do not necessarily have to apply to fixed or tracker rates. You can also use to it vary the duration of your loan.
For example, says Mendes, if someone is looking for a five-year fix but is expecting to receive a chunk of money in three, they may opt to have part five-year and part three-year.
You could even use the option to put part of your mortgage on an off-set mortgage to reap the benefits of your savings account.
