Can’t decide whether to fix your mortgage or move to a variable rate? Turns out you can do both.
Several major lenders, including Barclays and HSBC, allow customers to take out a home loan known as “half and half,” where one part is tied to a fixed rate and the other to a variable, like a tracker.
However, these options are often only available through a broker who will be able to view the option as part of a lender’s loan criteria.
Could splitting your mortgage into two loans help you handle rising interest rates and even pay off your mortgage sooner?
Others that will offer the hybrid are TSB and Clydesdale. NatWest offers the option, but only for existing customers.
The option could be useful for the 1.4 million people who need to re-mortgage by the end of this year and are reluctant to lock in a fixed rate in the hope that it will drop in the next two years.
Currently, the average two-year fixed rate is 6.52 percent according to Moneyfacts and the average five-year rate has also plunged through the 6 percent mark as home loan interest continues to rise.
The average follow-up rate is 5.98 percent, according to Moneyfacts.
What is a half and half mortgage?
A half-and-half mortgage, also known as a partial mortgage, is when the entire mortgage loan is divided into two loans with separate features.
Having two smaller loans instead of one larger one won’t hurt your credit score, but it doesn’t insulate you from the impacts of defaulting.
Nicholas Mendes, John Charcoal Mortgage Technical Manager, says: ‘Lenders will assess affordability based on the customer’s overall income to ensure serviceability and prevent the mortgage holder from defaulting.
‘But, if you default on part of the loan because the lenders have a charge on the security you can still rest.’
An HSBC spokesperson confirmed that under the bank’s system the two loans do not have to be equal in a 50/50 percent split, it could be any other split, for example 40 percent and 60 percent, or 80 percent and 20 percent.
What are the benefits of a half and half mortgage?
So if you want to get a two-year fixed rate but protect yourself in case rates drop during that time, you could put half of your loan into a tracking rate.
Paul Welch, Founder and CEO of Large Mortgage Loans, said: ‘If you can’t decide between a fixed or variable rate, some lenders will allow you to do both, known as a half and half mortgage.
“So you would assign a portion of your mortgage to a fixed-rate offer while paying the rest at a variable rate, which gives you a little more security in case rates go up, but also gives you the flexibility of not being tied to a potentially expensive fixed rate. in case rates go down.’
The option also has a use for those looking to overpay on their mortgage and can take advantage of follow-up rates that are usually free of prepayment fees.
Putting part of your mortgage on a tracker and another part at a fixed rate could help protect you against further interest rate increases.
Mendes adds: “Some people promote this as a way to hedge their bets, but I think it’s particularly useful if someone wants to have the ability to overpay more than 10/20 percent a year by having part of the mortgage in a free ERC tracker.’
In today’s environment, and with many mortgage holders looking to pay off debt quickly, this is a useful option to have the best of both worlds and not be penalized if you plan to make a significant overpayment to reduce debt.
The option could also be useful for those looking to port the loan.
Instead of having one part of the mortgage at a fixed rate and any additional loans at another fixed rate, leaving the two parts out of sync.
Having an additional loan on a tracker with no early repayment fees means that when the existing fixed rate comes to an end, you can refinance without incurring a penalty to pay off the second part of the loan if it’s a fixed rate.
Half and half options do not necessarily have to apply to fixed or trailing fees. You can also use it to vary the length of your loan.
For example, Mendes says, if someone is looking for a five-year solution but expects to receive a large amount of money in three, they might go for a five-year part and a three-year part.
You could even use the option to put part of your mortgage into an offset mortgage to take advantage of the benefits of your savings account.
GET YOUR MORTGAGE QUESTION ANSWERED
David Hollingworth is This is Money’s Mortgage Expert and a broker at L&C Mortgages, one of Britain’s leading specialists.
He’s ready to answer your home loan questions, whether you’re buying your first home, trying to re-mortgage amid rate chaos, or looking to plan ahead.
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