The ongoing conflict with Iran has sent shockwaves through the UK mortgage market, with hundreds of thousands of households facing an additional £3,000 annual bill as they roll off five-year fixed-rate deals. However, experts suggest a legal strategy known as 'mortgage splitting' could save borrowers up to £1,600 per year.
Rate Shock Hits Homeowners
Homeowners who secured five-year mortgage deals in 2021, when interest rates were at historic lows, are now confronting significantly higher rates upon renewal. According to research by estate agency Hamptons, these households will pay an average of £250 more per month, equating to £3,000 annually.
Aneisha Beveridge, head of research at Hamptons, commented: 'These households secured their deals when rates were pretty much at record lows, and many have had time to prepare for higher repayments. That said, the pace of rate rises, particularly in recent months, will still catch some off guard.'
Mortgage Splitting Explained
Brokers report a growing interest in 'mortgage splitting,' a technique that divides a home loan into two parts. The first part is a standard repayment mortgage, where the borrower pays down both interest and capital. The second part is interest-only, meaning the borrower pays only the interest and does not reduce the capital owed.
Nicholas Mendes, mortgage technical advisor at John Charcol, explained: 'It tends to work best where there is a clear reason for using it and a clear exit strategy. For example, someone with bonuses, investments, pension planning, or another asset they expect to use later may be in a stronger position than someone simply using interest-only because the full repayment mortgage feels unaffordable today.'
However, Mendes warned: 'It should not be treated as a quick fix without a plan, because the interest-only balance will still be there at the end of the term.'
Lenders Tighten Criteria
Elliott Culley, director at Switch Mortgage Finance, noted that lenders have become more cautious. 'Lots of people were coming to the end of their mortgage term with no way of paying it back, or having little equity to downsize. So most now cap the overall loan-to-value and want a minimum equity in the property. It reduces the number of interest-only mortgages they take on,' he explained.
Despite these restrictions, for those with a clear repayment plan, mortgage splitting can reduce monthly outgoings significantly, potentially saving up to £1,600 per year compared to a full repayment mortgage at current rates.
