13 February 2020
Increased flexibility for borrowers as lenders split mortgage terms and rates
Many borrowers are under the illusion that a mortgage term should be 25 years, while they agonise over whether they should choose a fixed or a variable rate. But increasingly, lenders are taking a more flexible approach, offering split terms when more than one party takes out the mortgage, as well as a combination of fixed and tracker rates, repayment and interest-only.
The rise in Joint Borrower, Sole Proprietor mortgages is behind the introduction of split mortgage terms. These mortgages enable parents to help children onto the property ladder – both incomes are taken into account for mortgage purposes but only the child goes on the property deeds, avoiding the 3 per cent stamp duty surcharge for second homes which would be incurred by the parent. The owner of the property opts for the usual mortgage term – say 30 years – while the parent has a shorter mortgage term that runs up to their retirement.
Split mortgages are also useful for later life borrowers who will not have repaid their mortgage by retirement. They can have a repayment mortgage while they are still working, followed by an interest-only mortgage when they retire, which can be paid out of pension income. This removes the pressure of a substantial mortgage payment every month in retirement although the capital will still need to be paid off at some point.
Lenders have long offered borrowers the option to split rates. A fixed rate can be taken for a portion of the loan to give some security and protection against rising interest rates, while the rest can be on a variable basis, usually with no early repayment charges. This enables the borrower to pay down this chunk more quickly, perhaps from bonuses.
Hinckley & Rugby is the latest lender to offer split terms, with other lenders offering similar flexibility. However, lenders differ considerably in what they offer: Santander allows a fixed and a tracker rate but on the same term, whereas HSBC can split terms and products but not on a repayment basis. Halifax cannot do split terms on a purchase but can do on a remortgage. It is therefore important to seek advice, particularly when it comes to later life borrowing.
Speak to one of our mortgage brokers for further information.