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Types of Mortgages |
| Repayment Mortgage |
| The most common type of mortgage is the Repayment Mortgage (or the
"annuity repayment" method as it is sometimes known). Repayment mortgages
are popular because they are simple to understand and straightforward to
operate. Every month your repayments are made up of the amount of monthly
interest due on your borrowings, together with a portion of the actual
amount borrowed (principal). In the early years of the loan your
repayments are mostly made up of interest. As the years progress you will
pay less interest and more principal, until eventually your entire loan
will be cleared. |
| Endowment Mortgage |
Another mortgage option is the Endowment Mortgage. This is
basically an interest only mortgage which is supported by an endowment
policy. During the term of the mortgage you will only pay interest to the
lender so the outstanding mortgage debt will remain constant throughout
the mortgage term. In addition to the interest you pay to the lender you
will also need to pay premiums into an endowment policy.
An
endowment policy is basically a life assurance investment/savings policy
which is designed to produce the mortgage amount at the end of the agreed
term. Most endowment policies taken out in connection with a mortgage do
not guarantee to repay the mortgage debt at the end of the mortgage term
so there is a possibility that there could be a shortfall. The eventual
value of the policy will depend on the performance of the fund in which
your premiums are invested so poor performance could result in the
maturity value being insufficient to repay the mortgage debt.
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| Pension Backed Mortgages |
Like the Endowment mortgage Pension mortgages are interest only
mortgages but this time supported by a pension plan rather than an
endowment policy. As with the endowment mortgage you will pay interest
only to the lender and at the same time you will pay premiums into a
pension plan. This is only an option for someone who is either self
employed or in non-pensionable employment.
The most common type of
pension plan to be used is a personal pension plan and this will be
designed to pay a tax free lump sum on retirement in addition to a monthly
pension income. It is the lump sum (or part of it ) which is then used to
repay the mortgage debt on retirement.
The advantage of this type
of repayment method is that the pension contributions attract tax relief
at the persons highest rate of tax. However, it is also important to
remember that unlike an endowment mortgage, a personal pension policy does
not provide automatic life assurance cover and this will need to be
arranged at an additional cost.
The eventual value of the pension
provided and the lump sum available will depend on the performance of the
pension fund into which your premiums are invested. In other words poor
performance of the fund could result in a disappointing final pension and
smaller than anticipated lump sum ( equally better than expected
performance will result in a larger pension ).
The tax free lump
sum available under the pension plan is not available until the pension
itself is taken. This means that the mortgage term needs to be run until
the anticipated retirement age. If the intended retirement age is 60 and
you are considering taking a pension mortgage at age 30 you will therefore
be looking at a 30 year mortgage term which will result in considerably
more interest being paid into that mortgage than if a 25 year term were
taken.
It should be noted that a Pep does not include any
element of life assurance cover and as such this needs to be taken as a
separate policy if it is required.
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