Split Mortgage Deals - Any Advice

Debbie123

I've been to see an independent mortgage adviser (via my estate agents). We've decided that repayment & interest only mortgages are not what we're looking for.

Looking to borrow £43,000 (tops) over 10 years. Advisor gave info on fixed/repayment. The idea is that we take out fixed mortgage for say 5 years & then the remainder would be repayment. In year 6 an endowment policy will mature and we can pay approx £10,000 off the mortgage). There will be a few months overlap from maturity of policy until repayment kicks in and we'd have to go on variable rate during that time.

We also have shares which we can cash in - advisor says might be best to wait until endowment matures, shares possibly worth more then and cash in at time to pay off the mortgage.

I can't seem to find any specific information on split mortgage deals.

Can anyone help or point me in the right direction.

Thanks

mrtg0525

It's a bit confusing - I assume that what he offered you is an interest-only deal for five years before it reverts to repayment?

It would help if you could explain why you think either a straight repayment mortgage or an interest-only is not for you, but a combination of the two would be?

Debbie123

For a full repayment on a loan of £43,000 over 10 years would mean £690 per month which we wouldn't be able to afford.

Interest only - whilst the payments would be approx £170 pm we would need to be in a position at the end of the 10 year term to pay off the outstanding loan.

I'm still in the early stages of looking for the right deal and it's so easy to get "bogged down" with everything that's on offer.

mrtg0525

OK - I was asking so I understood where you were coming from.

You're saying you're currently not able to afford the 690 pm repayment, are you sure you can afford this in five years' time? Because if you can't, then the (higher) repayment in five years time isn't working either.

The problem with split loans IMHO is that while you're paying the interest now, you're compression all the repayments into a much shorter time (five years instead of ten in your case) so after an initial, fairly cheap period the repayments are going to go through the roof.

Debbie123

This was not fully explained to me during my meeting with the advisor.

Do you have any advice on what ideally I should be aiming for?

The other thing is that we have an endowment policy which matures in 2013 - its only worth about £9000 now!! we also have shares which add approx £10,000 (at today's market). The advisor suggested that we leave the shares and cash them in when the endowment matures and we can then pay a lump sum off the mortgage - obviously making sure that we are not "tied" in. I understand with a fixed rate we can only pay 10% of the oustanding balance per annum. This is why he suggested an initial fixed period of say 5 years but as there will be an 8 month gap between the end of the fixed rate period and the repayment period we would have to go on a variable rate mortgage until the repayment kicked in.

If we chose this split mortgage and then say at the end of the 5 year fixed term, would we be able to look at other mortgage deals on offer.

Just so you'll know this is all new to me - never had to do this before. Partner had house before I moved in

mrtg0525

Debbie123 wrote: »

This was not fully explained to me during my meeting with the advisor.

Do you have any advice on what ideally I should be aiming for?

I would try to work it out the other way around - see how much you can afford to pay every month and then find a deal with a repayment schedule that suits you. Unless you absolutely have to pay off the loan over ten years, that is.

Debbie123 wrote: »

The other thing is that we have an endowment policy which matures in 2013 - its only worth about £9000 now!! we also have shares which add approx £10,000 (at today's market). The advisor suggested that we leave the shares and cash them in when the endowment matures and we can then pay a lump sum off the mortgage - obviously making sure that we are not "tied" in. I understand with a fixed rate we can only pay 10% of the oustanding balance per annum. This is why he suggested an initial fixed period of say 5 years but as there will be an 8 month gap between the end of the fixed rate period and the repayment period we would have to go on a variable rate mortgage until the repayment kicked in.

The gap between the end of the fixed rate period and the beginning of the repayment period is not the problem here; You will be paying more interest but as you're still interest-only, you shouldn't see the repayments rise that much.

The problem is that if you don't overpay during the 'interest only' period of the loan, you're still stuck with the principal of 43k or however much you borrowed. Only that at this time, instead of having ten years to pay it back, you've only got, say, five (if you've got a five year interest-only and a five year repayment period, which I'm currently assuming). If you were to pay off the principal in equal chunks (which isn't going to be the case, the actual calculation is a bit more complicated as the interest part of the repayment will or at least should go down in line with your repayments, so your first repayment is mostly interest and your last repayment is mostly principal but for a simple back-of-the-envelope calculation, this should give you an idea), the monthly repayment for the principal would be around GBP720/month. Plus at this point you're still paying interest on the outstanding principal, so your repayment is going to be even higher. In fact, I just plugged the numbers into the moneyfacts loan calculator and that suggested that 43k over 5 years @7% APR would work out at around 890/month.

And playing around with that loan calculator highlighted another interesting question - what kind of loan are you looking at here?

Because in order to get a 43k loan up to a repayment of 690/month (which sounded high to me anyway), I had to crank up the interest rate to about 16% APR. This is way above mortgage interest so it may be useful to know what kind of loan you're talking about here.

Debbie123 wrote: »

If we chose this split mortgage and then say at the end of the 5 year fixed term, would we be able to look at other mortgage deals on offer.

This really depends on the conditions of the mortgage, but a lot of them will allow you to change without a penalty once the fixed interest rate period is over. But don't take my word for it , you need to check the conditions of the actual mortgage. The Keyfacts sheet should have that on it.

Debbie123 wrote: »

Just so you'll know this is all new to me - never had to do this before. Partner had house before I moved in

Tell me about it - I'm just in the process of remortgaging for the fist tiem so I know what that's like...

Debbie123

Thanks for all you information. It really helps. I've looked through my notes again following my initial discussion with the mortgage advisor. The £690 per month (repayment) was based on a term of 6 years to coincide with the endowment plan maturing.

If we opt for a 10 year term the payments would then be £460 per month which seems OK.

I think understanding a bit more about the split mortgage and interest only that a repayment would be what we are looking for. We simply want to be mortgage free in a short time period. We still had 6 years to run on our outstanding mortgage (interest only). We were looking at the payments that we could afford over the 10 years.

Any ideas who is offering the best deals on repayment loans? Can we pay off lump sums as and when we please?

Thanks for the link on the mortgage calculator!

Deb:hello:

JoeK_3

Sorry to complicate this but in my opinion you have an extremely adventurous approach by what is being suggested.

Let me explain:

1) Is there any projected shortfall on the endowment?
2) What is the endowment projected to be worth on maturity?
3) What growth rate is the maturity based on?
4) Who is the endowment provider?
5) Where are the endowment monies invested?

Further to the above, you state that you have a share portfolio. Shares can and do have a habit of crashing. As this cannot be predicted, how do you know what value the portfolio will be in five years time?

Now, I'm not being negative here but I'm being realistic.

In my opinion, the only good bit that the mortgage adviser has recommended is a fixed rate, as it's obvious that you could suffer from any future rate increases.

In my opinion, the plan that has been put together is severely flawed and for the reasons mentioned above could fall apart very easily.

Give the points raised some thought and come back with everything taken into consideration.

JoeK

mrtg0525

Yup, I'd have to agree with JoeK - don't bet on the shares or endowment if you absolutely have to have the money at a certain point in time because then you potentially paint yourself into a very expensive corner.

Which is one of the reasons that I am going for another straight repayment mortgage in my remortgage instead of anything more sophisticated/complex as I do understand the downsides well enough to know that I don't want them.

Debbie123

Thanks for that.

Yes, there is a projected shortfall. The value of the plan as at 14th June 2007 is £9,249. (minimum guaranteed cash sum)

If the investment grows by 4% = £10,700
If the investment grows by 5.5% = £11,600
If the investment grows by 8% = £13,200

The endowment provider is Friends Provident

Basically we have an outstanding mortgage of £15,000 (interest only). The house has been valued at £124,950 but I've used a selling price of £120,000 (being realistic).

We're looking at a property in the region of £140,000 (tops) - again being overly cautious as it could be slightly less.

The mortgage we have in on a standard rate 5.75% and we can pay off any amount we want as long as it's over £500. There is no early redemption penalty either.

My thoughts were to realise the shares now to reduce the amount of loan we need to borrow and let the endowment plan run its course. We are keeping it merely as an investment plan. Upon maturity we would then use the lump sum to pay off on the mortgage regardless of its maturity value. We know that in 2013 we will get something back and plan to use it against the mortgage.

Does this make sense or am I completely wide of the mark!

Deb

JoeK_3

You could consider the following as an alternative:

Endowment sale or surrender = £9,249
Sale of shares = £10,000
Total = £19,249

Proposed mortgage amount £45,000 less £19,249 = £25,751
New mortgage loan amount of £25,751 at 10 years repayment mortgage x 6% five year capped rate = £285.89 pm.

Add back to this the cost of additional decreasing term insurance costs.

Does your endowment have any critical illness cover with it?

JoeK