This
is a relatively new type of mortgage that's designed to be
a halfway house between an Interest-only
mortgage and a repayment
mortgage (also known as capital and
interest).
The idea is that it combines the advantages of both types,
while minimising the disadvantages.
Basically, part of your mortgage is interest-only and the
rest is repayment it's up to you to decide what split you
want.
The pros and cons
• Compared to a
repayment mortgage
The monthly repayments are cheaper than for a comparable fully
repayment mortgage.
This is because, while you're paying interest on everything
you owe, you're repaying only part of the capital.
In the long run, though, this makes a part and part
mortgage more expensive than a straight repayment
loan, as more of your debt remains unpaid during the term
and, therefore, collecting interest.
• Compared to an
interest-only mortgage
Because of the capital repayment element, the monthly payments
are higher than for a comparable interest-only mortgage.
However, it is less expensive over the full mortgage
term.
This is because you are paying off some capital as you go,
reducing your interest bill and leaving a smaller debt to
be settled at the end of the term.
How this works in practice
Imagine you agreed to a £150,000 mortgage at 6 per
cent interest
• Interest-only
On a fully interest-only basis, this would cost £750 a month
giving a total of £225,000 over 25 years.
Add in the original £150,000 which would still need to be
repaid
Total cost: £375,000
•
Repayment
On a fully repayment basis, it would cost £966.45 a month,
adding up to £289,935 over 25 years.
At the end of the 25-year term, you would be debt-free.
Total cost: £289,935
•
Part and part
Dividing
the debt equally between interest-only and repayment, the
monthly cost would be £858, giving a 25-year total of £257,466.
But you would still owe £75,000.
Total cost: £332,466
So, going part and part on this basis would save you £42,534
on the straightforward interest-only deal, but be £42,531
more expensive than the fully repayment option.
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