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mortgage guide: repayment mortagage
Payments are calculated so that the whole loan is repaid at the end of the agreed loan term.
Each payment consists of a combination of interest and capital repayment. In the early years of a loan the interest element forms the major part of the payments and as a result the borrowing reduces gradually. However as time goes by the proportion of capital repaid increases and the loan will be repaid at the end of the term. This is on the proviso that all payments are made to the lender on time and as they fall due.
The main advantages are:
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Simple and easy to understand
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Your loan is guaranteed to be repaid at the end of the term providing you make each repayment when it is due
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Offers you a choice of repayment periods so that you can vary the monthly payments to meet your circumstances
It is important with a repayment mortgage that you take out separate life assurance and critical illness cover to ensure that your mortgage is paid off and will provide financial protection in the event of critical illness or death for you and your family.
mortgage guide: interest only mortgages
These require payments, which cover the interest but make no reduction to the capital amount. The lender will require repayment of the total borrowing at the end of the agreed loan term.
What this means is that interest is charged on the whole balance for the life of the loan rather than on the reducing balance of a Repayment Mortgage.
However it is the responsibility of the borrower to ensure that when repayment is due they have sufficient funds to repay the borrowing.
Unless you have the means, or will have the means to when the time is due, to repay the loan, you will need to set up some form of investment product to build up sufficient funds to cover the amount borrowed;
The types of investments usually available are:
It is the customer’s responsibility to ensure that an adequate repayment method is in place, and is maintained, throughout the term of the mortgage. Failure to maintain funds to repay the loan may result in the loss of the home at the time repayment is due.
Before you choose, we recommend you take advice from a financial adviser who specialises in these matters.
Interest only mortgage: ISA
An ISA can be used with an interest only mortgage, with the proceeds being used to repay the mortgage borrowing at the end of the term. You pay an agreed sum, either monthly or annually, into an ISA which is targeted to meet the outstanding loan based on certain growth assumptions.
ISA’s are a tax efficient way of repaying your mortgage, but the final value of your savings is not guaranteed and might not be sufficient to repay all of what you have borrowed.
It is important to bear in mind that an ISA does not include life cover and you are therefore strongly recommended to take out a separate policy to repay what you owe should you die or suffer a defined critical illness within the term.
Interest only mortgage: Endowment
By using an endowment or pension to repay your mortgage, you pay an amount, usually monthly, to a life assurance company, which buys a policy to repay your loan at the end of the mortgage term. Depending on how well your policy has performed there could be a cash surplus available for you after your mortgage has been repaid. On the other hand if it has under performed, it may not provide enough and you will have to make up the difference yourself.
With endowment mortgages it is important therefore to ensure that regular checks are carried out to make sure the policy is performing well enough to generate sufficient money to repay the mortgage at the end of the agreed term.
An endowment policy includes life cover to repay your mortgage in the event of your death prior to the end of the mortgage term.
Interest only mortgage: Pension
By repaying your mortgage by way of using a pension plan, you make regular contributions into a pension plan and the amount you borrow is repaid from the lump sum you are able to draw from the plan when you retire.
However, by using part of the lump sum to repay the mortgage, there will be less money left over to provide an income for your retirement.
You should ensure therefore, that there will be sufficient in your pension plan to repay what you owe and also to provide you with an income to maintain the standard of living that you require in retirement.
Pension plan mortgages are currently a very tax efficient arrangement as your pension contributions are tax relievable and the lump sum which you use to repay your mortgage is tax free. However this situation may be affected by any future changes to the tax treatment on pensions.
It is recommended that you take out separate life cover to repay the mortgage should you die or suffer a defined critical illness within the mortgage term.
General Notes on Interest only mortgages
It is important to remember that with an interest only mortgage all repayment vehicles used to repay the mortgage at the end of the agreed term are long term arrangements and the returns could be small, possibly less than the contributions you have made if you were to cancel early.
In addition, at the end of the agreed mortgage term if you cannot repay the mortgage you will have to continue to make interest payments to the lender each month until the loan is finally repaid.
It is always your responsibility to ensure that any investment plan or life policy is maintained.
Contact Unizone for a free evaluation of your situation
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
PLEASE BE AWARE THAT SOME MORTGAGES ARE NOT REGULATED BY THE FSA -
INCLUDES BUY-TO-LETS, COMMERCIAL, OVERSEAS AND SECOND CHARGES