Financial Times Weekend 22-23Feb2020

6 |FTMoney FINANCIAL TIMESSaturday 22 February 2020

COVER

I

ncreasing numbers of borrowers

are splitting their mortgage, tak-

ing advantage of rising competi-

tion between lenders to divide

the debt on home loans to suit

their financial circumstances.

The buyers of top-end properties

and parents acting as the “Bank of

Mum and Dad” are two groups to

whom this trend appeals, mortgage

brokers report.

As confidence returns to the

market, more UK buyers are using

brokers to help them secure more

flexible deals involving more than

one type of loan from the same

lender.

FT Money looks at the different

ways of splitting mortgages and the

financial pitfalls that home buyers

should consider.

Split the difference

A common way of splitting mort-

gage debt is for part of the loan to be

repaid on a capital repayment basis,

and the rest on an interest-only

arrangement.

Many borrowers would prefer to

take out an interest-only loan on the

whole property, but because of regu-

latory changes they are limited by the

50 per cent loan-to-value restriction

imposed by most lenders. Splitting

allows them to take out the maxi-

mum interest-only loan and combine

it with a capital repayment mortgage

from the same lender.

Others choose to split because they

want to set themselves the discipline

of paying off some of the loan capital

within a set timeframe, or know that

a cash lump sum is heading their way

in the future.

Borrowers also want the flexibility

to adjust their repayments should

interest rates change, choosing to

have part of their loan on a tracker

rate that allows unlimited over-

payments and another portion on a

fixed rate.

It is possible to lock into competi-

tive rates on five or 10-year loans,

but borrowers are also alive to the

possibility that the Bank of England

could cut interest rates later this year

if the UK economy takes a turn for the

worse. Splitting the type of loan is one

way of hedging their bets.

Mortgage brokers say that split

deals are a niche arrangement and

seldom promoted by banks and

building societies, although competi-

tion is so hot that lenders will often

permit a mortgage to be structured in

a number of ways to suit a borrower’s

needs.

“A lot of lenders have the capability

to do things that they don’t necessar-

ily tell people about,” says Mark

Harris, chief executive of mortgage

broker SPF Private Clients.

“People don’t necessarily know

that you can mix and match to suit

your needs. With borrowers increas-

ingly demanding flexibility, some

lenders are able to split the terms to

suit the individual circumstances of

those taking out the mortgage.”

Splitting deals is most common at

the higher end of the market where

borrowers are taking on significant

debt. Structuring a property pur-

chase in this way can be an effective

financial planning tool if the bor-

rower is expecting to receive an

inheritance, bonus payment or funds

from selling a second property in the

near term.

Will Rhind, mortgage broker at

Habito, says clients commonly con-

sider a split deal if they are expecting

a tax-free lump sum from their pen-

sion in a few years.

“It’s possible to match the expected

lump sum figure on maturity with the

interest-only portion of the mortgage

and structure the rest on a capital

repayment basis,” he says.

Mr Rhind says Santander is a popu-

lar choice of lender for these sorts

of splits, as it does not have a mini-

mum income requirement for bor-

rowers taking out interest-only

mortgages. However, Habito and

other brokers report they have used

HSBC, Halifax, Nat West, Barclays

and Accord to structure similar prod-

uct splits.

Brokers can combine different

fixed rate or variable rate deals in the

expectation that the borrower will be

able to pay off the shorter term ele-

ment within a year or two.

Simon Gammon, managing part-

ner of mortgage broker Knight Frank

Finance, gives the example of a

£500,000 mortgage split three ways

— one-third on a five-year fixed rate

deal, one-third on a two-year fix and

the final third on a variable rate with

no penalty for overpayments.

This type of arrangement could be

applicable “for someone who wants

the freedom to pay off large parts of

the loan at different times while

retaining the security of a fixed rate”,

he says.

Banking on mum and dad

Split deals are unnecessarily com-

plex for most borrowers, but they

tend to attract higher-earning home-

owners such as bankers, law firm

partners or self-employed people,

who receive their income in lumps at

unpredictable intervals.

Andrew Montlake, managing

director of mortgage broker Coreco,

said: “You tend to see it more at the

higher end but it can work for lower

earners too — say a first-time buyer

who wants the security of a five-

year fix but whose parents are look-

ing to give them a lump sum in two

years’ time.”

He says that some borrowers are

surprised at the willingness of mort-

gage lenders to entertain split deals,

but rising competition for customers

and ultra-low interest rates mean it is

harder for banks to differentiate

themselves.

Mr Harris adds: “Today’s lenders

are finding it hard to find volume, and

are having to be flexible. Most of the

big lenders will allow you to split, but

some others haven’t got IT systems

capable of providing it.”

Brokers report that demand for

combination deals has increased

this year as market confidence has

grown following the election.

One variant on a mortgage split was

launched earlier this month by the

Hinckley & Rugby Building Society,

based on a “joint borrower sole pro-

prietor” mortgage where a buyer uses

the financial backing of another per-

son — typically a parent or grandpar-

ent — to qualify for the mortgage but

retains sole ownership of the home.

These specialist loans allow parents

to help their children on to the prop-

erty ladder without triggering

the stamp duty surcharge aimed at

second homeowners.

HRBS’s new deal would allow a par-

ent acting as the Bank of Mum and

Dad to have a shorter repayment

term on the mortgage than their child

to reflect changing income levels at

different stages of their working lives.

“We wanted to add the ability to

split so we can help first-time buyers

where the parent’s working income is

needed for affordability,” says Caro-

lyn Thornley-Yates, head of sales and

marketing at HRBS.

“Almost all parents plan to retire,

usually before a child’s mortgage

term would end. Splitting the terms

recognises this while enabling

families to help their next genera-

tions into home ownership.”

With mortgage terms commonly

Whyborrowersare

‘doing thesplits’

ontheirmortgages

Borrowers seeking greater flexibility on home loans are

asking brokers to split the difference — and lenders are

often only too keen to help out.James Pickford reports

One common driver for “doing the

splits” on a mortgage is to avoid

penalty fees when a borrower

expects to repay a chunk of capital

early, but wants interest rate

certainty on the rest of the loan.

Andrew Montlake, managing

director at broker Coreco, gives the

example of an £880,000 mortgage

recently arranged with HSBC on a

property purchase of £1.15m.

The borrowers were moving

back to the UK after working

abroad; they had sold their home

overseas but retained a buy-to-let

in the UK which had no mortgage.

Their plan was to sell the rented

home in a year or two, and plough

the proceeds into paying down the

debt on their main residence.

Mr Montlake recommended a

repayment mortgage of £440,000

on a two-year fixed rate of 1.49 per

cent, and the other half on a five-

year fixed rate of 1.84 per cent.

“Given their foreign income and

address at the point of application,

HSBC was the most appropriate

lender,” he said.

Casestudy

Managingarepayment

FINANCIAL TIMESSaturday 22 February 202 0 FTMoney| 7

STORY

stretching for 30, 35 or even 40 years,

this is a pertinent consideration.

Debt slicing

Another wayborrowers use split

deals is by agreeing a home loan in

tranches — typically because they

need to borrowacertainamount

today, but will need more when

another property becomes available

to buy. The lender will “pre-agree”a

higher amount in readiness for the

moment when that investment has

beenidentified.

Speed is the chief motivation for

this open-ended arrangement, Mr

Gammon says. “Ifyou’re in a compet-

itive bid situation — sayfor the house

on the coast that doesn’t come up

very often — you might want the abil-

ity to say you can exchange by Friday.

People feel it’s an advantage.”

However,Mr Harris warns that

borrowers consideringa split deal

over longer periods should be wary of

signingup to somethingthat ties

them in too tightly. The number of

five-year, seven-year and 10-year

fixed-rate deals has been rising,but

borrowers must be aware of thepen-

alties of repaying these loans early.

“If you agree a split and the lender’s

rates are competitive, that’s good,”he

says. “But if it turns out later their

rates aren’t so good, it’s important to

haveanoption to switch lenders.”

Anotherpoint for borrowers con-

templating the splits is the level of

arrangement fees they will end up

paying. Most mortgage splits will use

products from the same lender, but

some lenders will charge separate

product fees for these.

This does not usually deter large

mortgage borrowers, Mr Harris says:

“If by selecting multiple products you

can create the perfect bespoke mort-

gage, the payment of additional fees

will pale into insignificance.”

Although borrowers are finding

they can take advantageofgreater

mortgage flexibility, they may not

need to stretch to a split.

Mr Rhind says that thejob ofa

mortgage broker is to ask lots of ques-

tionsaboutaborrower’scircum-

stances andfindthe best dealto suit.

“Some people might think a split is

the best thing because they’re expect-

ingsome bonus money in the future,

but most mortgage lenders will allow

you to overpay 10 per cent of your

outstandingbalance every year with-

out incurring a penalty,” he

says. “Rather than paying for two

products, it might be a better option

for you simply to do that.”

There have been renewed signs of

activityin thepropertymarket in

recent weeks, as thegeneral election

result removed someofthe

uncertainty that has been hanging

over the market for thepast three

years.

Average house prices in London are

risingat theirfastest ratefor more

than two years, accordingto

Land Registry data this

week,with all areas of

the UK seeingan uplift

inthe past year.

Estate agents

report that inquiries

from new buyers, the

number ofagreed sales

and pricingexpectations

are runningat theirhighest

levels for three years.

Last week’s datafrom the Royal

Institution of Chartered Surveyors

found that 17 per cent more Rics

members reported a rise in new buyer

inquiries comparedwiththose

reportingafall — the highest level

since the beginningof2016, and up

from minus 5 per cent in November.

The outlook for sales and prices

over the coming12 months was even

brighter, accordingthe survey, with 6 6

per cent more respondents saying

they expected sales to rise.

The topend ofthe market — which

had beenparticularlyhit byBrexit

related uncertainty — is also showing

renewed signs oflife.

HMRCdata releasedthismonth

showed that sales of£1m-plus

homes hit a decade-longhigh over

thepast six months of2019, based on

provisional stamp duty

figures.

In the lastthree

months of 2019 ,the

quarterlysales total

hit 5,300 transactions

— the highestfourth

quarterfor at least a

decade.

A further positive

indicatoristhenumberof

searches being

conducted via online property portals.

Rightmove recordeditsbusiest

month in January, with 152m visits to

itswebsite.Thenumberofsales

agreed on propertiesfeatured on its

site was up by 12 per cent compared

with January 2018.

Properties in London saw the

biggest year-on-year increase in clicks,

with a 26 per cent rise,followed by

properties in the east of England,

which rose 20 per cent.

Post-election signs of life

in the property market

Stamp duty transactions and receipts

Source: HMRC

2016-20

Transactions

(’000)

Receipts

(£m)

350

300

250

200

150

100

50

0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0

2016 17 18 19

Property market sentiments turned positive

after the election

Source: RICS Residential Market Survey

Sentiment survey of chartered surveyors, net balance %

-40

-30

-20

-10

0

10

20

30

2016 17 18 19

Sales expectations Price expectations

New buyers’ enquiries Agreed sales

FT montage

‘Today’slendersarefinding

ithardtofindvolumeand

arehavingtobeflexible.

Mostofthebiglenderswill

allowyoutosplit’