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 Mortgage Options

Repaying your mortgage

 
While there are many different mortgage options, there are just two types of mortgage, interest only and repayment (capital and interest).

With an interest only mortgage you pay the interest only to the lender and take out a further investment alongside which you hope will pay off the loan at the end of the term.

Mortgage lenders are fairly flexible about what investment method is used to pay off the loan and popular choices have been endowment policies, unit trusts and pensions.

With a repayment mortgage each payment made pays both the interest and a small part of the capital. With this type of mortgage your mortgage loan will be paid off at the end of the term.
With a repayment mortgage you are using your capital to actively reduce your debt at whatever the prevailing building society interest rate is. With a interest only mortgage you hope that your invested capital will achieve a better rate of return than the building society interest rate.

Mortgage Term

A mortgage will have a maximum term as permitted by the mortgage lender, up to normal retirement age. For example if the elder applicant is 30 years old then a term of 34 years is potentially possible.

If you extend the term you will reduce the repayments on a capital and interest mortgage.

For example, the monthly repayments on a capital and interest mortgage of 100,000 over 25 years would be 591 pcm. If we extend the term to 35 years, the monthly payment reduces to 509 pcm

Bear in mind that the longer the term, the more interest you will be paying back to the mortgage lender. For this reason it is a good idea to choose a minimum term that is consistent with being affordable and maintaining your quality of life

With an interest only mortgage altering the term makes no difference to the monthly mortgage payments

Investments

Mortgage lenders will take an interest in how the mortgage will be repaid. Many lenders require that you have an investment in place prior to taking out the mortgage. Please contact us to discuss further.

The following investments have been popular choices for people with interest only mortgages.

Endowment policies : These policies are run mainly by insurance companies and friendly societies. They are regarded as low to medium risk investments. The fund managers invest on the stock market, in property and in fixed interest investments. Policies can be unit linked or with profits. Unit linked means that a value is calculated, usually daily which directly relates to the value of the underlying fund. Unit prices can be followed in the broadsheet newspapers.
A 'with profits' policy entitles you to a share in the profits of the insurance company. Issuing companies vary their annual bonus according to investment performance and anticipated future investment conditions. The variance in annual bonus has historically been small which provides a degree of security to the policyholder. A terminal bonus is also normally declared at the end of the term. Life assurance is included in the contract which will pay off the mortgage in the event of death.

Unit trusts : Predominantly stock market investments where your money is 'pooled' together with other investors in a fund which may be managed or unmanaged (tracker). There is a risk element to your capital as unit prices can fall as well as rise, and a periodic review would be recommended to ensure that the fund performance is adequate. This type of fund is quite flexible and tax free benefits are available if taken out within an ISA.

ISA : ISA's are tax free investments which can be used with an interest only mortgage.

Pensions : If you are eligible for a personal pension, you can opt to use part of your pension fund to clear your mortgage. This will obviously reduce the amount that you will have available to go towards your pension, however you will receive full income tax relief on your contributions. This means that a higher rate taxpayer paying 100 per month into a pension fund will in fact only contribute 60 per month, the balance being paid by the inland revenue. There are many different types of pension fund available and we would be happy to advise on this subject.