Buying a home is one of the biggest commitments you will ever
undertake. So choosing your mortgage does take thought. Take some
time to consider what mortgage is right for you. After all it’s your
money you will be spending so, I would recommend utilizing it in the
best way possible.
The kinds of mortgage available to you
There are thousands of different mortgages on the market at the
moment, all offering something different, something similar but
essentially offering one of two types:
●Repayment and Interest, with a repayment and interest mortgage
you (the lender) you will have to payback the specified mortgage
amount plus the interest in a specified time. For example if you
borrowed £100,000 over 25 years, the total plus interest is
£190,000 over 25 years, this is what you will repay. You will see
the balance becoming increasingly smaller over the term of the
●Interest only, with an interest only mortgage you only pay the
interest on you mortgage, however when the term of your mortgage
is over you are still left with the initial buying fee of your
house. Using the above example this would be £100,000 still left
to pay. When you take an interest only mortgage you will need to
take out an alternate savings plan, in the form of a pension,
I.S.A, or an endowment. These alternate plans run alongside your
mortgage to accumulate the final sum to zero your balance after
the term is over.
Advantages of a repayment and interest mortgage
●It is possible for you to pay off lump sums of your mortgage to
minimize the balance and make term shorter. However do be careful
as some lenders do charge for a early settlement. If you do
decide to repay early it is better to do upon the changing period
of your mortgage i.e. when you are eligible to start another
discounted term with another lender.
●You do not always have to take out life insurance with a
repayment mortgage. Some pension plans that are in place do cover
for unfortunate events such as death.
●You know the full balance of your mortgage and also the term of
the repayment, so you always know when your mortgage will be paid
Disadvantages of a repayment and interest mortgage
●In the early years of a repaying your mortgage the majority of
the monthly repayment is interest rather than capital. For
lenders who move house regularly, this can mean that little of
the capital is paid off.
●If no life insurance, pensions or assets are in place to cover
the repayment of the house. In the unfortunate event of a death
the house will still have to be repaid. If payments are not kept
up to date then the house will be sold.
●There may be financial penalties for making additional payment
into your mortgage account.
Interest only mortgage
With this type of mortgage, only the interest is paid off with each
mortgage payment. After the term of the mortgage elapses e.g. 25
year period, the lender is left with the full balance for the
initial purchase of the house. To combat this problem (if you do not
have the money to repay after the term is over) you the lender can
take out another policy to run along side the mortgage payment?
These policies are an ISA, pension plan or endowment policy. When
you find a policy to suit you? The policy will grow along with your
mortgage to accumulate the balance of you initial payment over the
same term as your current mortgage. So at the end of the specified
lending term you have the correct amount of funds to pay your
Using a pension plan to accumulate the balance of your mortgage is a
tax free saving scheme. The balance of your house will be saved over
a period of time until you can pay your final balance. If you do
intend to use a pension fund to save for the balance of your house,
consideration should be taken into account to open another pension
fund for retirement purposes too.
With an ISA plan you invest in stocks and shares via an Individual
Savings Account (ISA) – which is a tax-free method of saving. This
method of saving may not be suitable for most borrowers. Before
considering this option you should consult with an independent
An endowment is still the most common type of interest only mortgage
which also provides life assurance cover and a fixed payment for
investment. The endowment policy along with the interest only
mortgage should in effect end at the same time, leaving you with the
ownership of your home and nothing to pay. Endowments have undergone
much criticism; this is due to investors being promised high returns
from their investments. However lately this has not been the case,
borrowers have found their investments have been as good as expected
and a shortfall in the end amount of invested cash will not match
the amount owed on the current property.
Taking into account the recent problems that have arisen regarding
endowment policies it is worth remembering that returns on endowment
policies have been pretty good, however you do need to see the term
out in full. Also endowments do provide life assurance as part of
the actual policy, so in the unfortunate event of a death the
mortgage balance is paid in full.
Advantages of an interest only mortgage
●Your investments and savings could accumulate more than the
required amount to cover the final payment; this could leave you
more cash for your own personal use.
●Some plans have good tax benefits and help reach the required
amount it a quicker and cheaper rate.
Disadvantages of an interest only mortgage
●In the unfortunate event of your investments not acquiring the
designated amount of cash to cover the loan repayment, the
investor could face a shortfall which they will then need to pay.
If you are worried about a shortfall on your investment, you
should keep in touch with your investor and request regular
updates on the situation of your endowment. If the worst comes to
the worst, you can increase payments to compensate for the loss
●Cashing in your endowment, ISA or pension could have adverse
effects on the amount of money you have saved over the past
however many years. If you do decide to cash in any existing
policies you may be subjected to a penalty, this could be a cash
amount specified by the investment company/lender. Please seek
professional advice if you are worried about the end results of
your finances, don’t be too hasty as most policies accumulate
more of the cash in the final year.