Mortgage Advice in Bishops Stortford:
repayment methods
Choosing a Mortgage: What is a Mortgage?
A mortgage is a loan; money that you borrow to buy or improve a home.
The amount of the mortgage you can get is based on:
how much you can afford to borrow, and the value of the property that you are buying.
The mortgage lender will charge interest on the amount that you borrow.
You repay the money you borrow - and the interest - by an agreed method of monthly repayments over an agreed term (usually a number of years).
Finding your way through the mortgage market can be a daunting and stressful process. There are so many mortgages to choose from, and so many lenders offering them!
The right mortgage should suit your financial circumstances, your age and your lifestyle. Yet even taking these factors into consideration, the chances are you will still have many types of mortgages to choose from, as well as a variety of interest rates.
Getting Advice
An Independent Financial Adviser (IFA) or mortgage intermediary will be able to advise you about a mortgage loan together with the associated investment and insurance arrangements you may need to take out.
Some mortgage lenders advise only on the mortgage loan; others are tied to a life company and can therefore also arrange the associated investment and insurance; the final group of mortgage lenders are independent, but have links with insurance companies who will advise on investments and insurance.
There are three principal types of mortgage to choose from:
Repayment
You pay back part of the loan with the interest each month, gradually reducing the amount you have borrowed.
Interest-Only
You only pay interest to the lender each month. The loan amount (capital) remains the same for the duration of the loan. In order to repay the capital at the end of the term, you arrange the appropriate investments when you take out the mortgage. Includes Endowment Mortgages, Pension Mortgages and others.
Flexible
This relatively new type of mortgage allows you to make overpayments and underpayments on your mortgage without penalty, and even to take payment holidays. Although Flexible Mortgages are sold as 'Repayment' or 'Interest Only' mortgages, their very nature means that if you make regular overpayments and decide not to draw these back, you can repay your mortgage early and save thousands of pounds in interest.
Repayment Mortgages
With a Repayment Mortgage each monthly payment comprises part capital and part interest, structured in such a way as to pay off the amount borrowed by the end of the mortgage term.
You make one payment per month to the lender:
Interest on the mortgage + Capital
Important Points
A Repayment Mortgage is simple and straightforward.
It guarantees full repayment of the loan, as long as you keep up your payments.
The amount that you owe the lender goes down as the years of the mortgage term go by.
Higher interest rates have less impact in later years (because there is less capital).
With a Repayment mortgage it is not mandatory that you arrange life cover to repay the mortgage.
Even though a Repayment Mortgage does not always require a life assurance policy, it is advisable to arrange one (at the very least "term assurance") to make sure that the loan can be repaid if you die. If you don't do this, the property may have to be sold in order to repay the mortgage.
When you move, provided that you have kept up all payments on your mortgage, the loan on your property will have been reduced, providing you with additional capital to use as a deposit on your next home.
Interest-Only Mortgages
With an Interest-Only mortgage you pay interest only on what you have borrowed. The amount you owe never goes down, because you do not repay any capital until the end of the term.
To repay the capital you contribute towards a particular type of investment, or series of investments (known as the 'repayment vehicle'), which should provide you with a cash sum large enough to repay the loan at the end of the term.
There are different types of Interest Only mortgages, named for their associated investments. But although the investment may vary, the nature of the mortgage is the same. Some of the different kinds of Interest Only mortgages include: Pension Mortgages; Endowment Mortgages; ISA mortgages.
Important Points
Remember that the value of any investment can go down as well as up.
If an investment performs badly, it may not provide enough to repay the loan. It is your responsibility to make sure that you have enough to repay the loan at the end of the term.
Investments associated with an Interest Only mortgage are portable, which means that you can keep them, or add to them and link them to your new mortgage if you move house.
The original amount that you borrow never goes down. If you sell your home you will need to be able to repay that amount.
With an Interest Only mortgage, you normally have to arrange at least two transactions: the mortgage, and the investment.
Even though an Interest Only mortgage does not always require a life assurance policy, it is advisable to arrange one (at the very least "term assurance") to make sure that the loan can be repaid if you die. If you don't do this, the property may have to be sold in order to repay the mortgage. Guide 4:
Flexible Mortgages
Although Flexible Mortgages are sold as 'Repayment' or 'Interest-Only' mortgages, the flexible payment options they offer deserve a separate mention because they allow you to rewrite the rules!
Key Features of Flexible Mortgages
• allow you to make overpayments on your mortgage which you can draw back at any time
• allow you to pay back your mortgage sooner if you choose not to draw back all overpayments
• normally calculate interest charges daily, giving you the full benefit of any overpayments
• normally allow you to make underpayments or to take payments holidays, provided you do not exceed your original mortgage threshold
• some also offer a 'current account' option, enabling you to pool all of your income in one place and write cheques or use a debit card from your mortgage account
• most flexible mortgages don't charge redemption penalties
Key Benefits
• enable you to adapt payments to suit your day-to-day lifestyle
• can provide you with substantial interest payment savings
• allow you to pay your mortgage off early and own your home sooner if you so wish
• provide a tax-efficient home for temporary surplus funds; the money you can save on your monthly mortgage will normally exceed what you could earn in a savings account - and these are normally subject to income tax!
Interest-Only Endowment Mortgages Explained
Endowment Mortgages
With an endowment mortgage, you contribute towards an investment that includes life assurance. This should, dependent on investment performance, build up a cash sum large enough to repay the loan.
You make two payments per month:
Interest on the mortgage + Endowment payment or "premium"
Interest is paid to the lender. The endowment premium is paid to a life assurance company which in turn invests the money in a variety of ways including stocks and shares, unit trusts, government bonds, cash accounts, and so on.
Types of endowment differ (see below) and it is important that you always take expert advice to ensure you choose the right one for you.
Full Endowment
This type of endowment has a sum assured equivalent to the full amount of the loan. It is guaranteed to pay off your loan either at the end of the term or on death, whichever should occur first.
Low Cost Endowment
A combination of an endowment and a decreasing 'term assurance' - providing a cheaper alternative than a full endowment.
This is created by the endowment policy having a sum assured lower than the amount of the loan, with the expectation being that, as the investments grow, there should be enough money to pay off the loan at the end of the mortgage term.
However, it is important to remember that the value of investments can go down as well as up, and that is your responsibility to ensure you have enough capital to pay off the loan when it becomes due.
Important Points
The life assurance offers financial protection for the duration of the mortgage. Thus the loan would automatically be paid off if you die.
You can normally boost your Endowment Plan with additional lump sum or regular contributions.
Depending on the performance of the life company's investments over the period of your contributions, there may be money left over after paying off the loan at the end of the term.
However, remember that the value of any investment can go down as well as up.
If an investment performs badly, it may not provide enough to repay the loan. It is your responsibility to make sure that you have enough to repay the loan at the end of the term.
As an endowment is a long-term investment, it may lose value if you cash it in early.
An endowment plan is "portable", which means it can be transferred from one mortgage to another if you re-mortgage or move house.
Interest-Only Pension Mortgages Explained
Pension Mortgages
Pension mortgages are principally available to the self-employed and to employees in personal or 'executive' pension schemes. However, some lenders will also consider members of group pension schemes. Always check with your lender to ensure you are eligible to take out a pension mortgage.
With a pension mortgage, you take out a pension plan (usually with a life assurance company). Your monthly contributions should build up a cash sum large enough to repay the loan and to provide an income when you retire.
You make two payments per month:
Interest on the mortgage + Personal Pension Plan contribution
Interest is paid to the lender. The pension plan contribution is paid to the company providing the pension.
Important Points
You can use only the 'lump-sum' element of you pension to pay off your mortgage.
The amount you can contribute into your pension plan will increase, depending upon your age and salary. You may also be eligible to make additional lump sum contributions. However, according to Inland Revenue Guidelines there are limits to the amount you can pay into a pension plan.
You cannot use any portion of a pension plan until your 50th birthday. Thus to repay your loan before your 50th birthday, you would have to use other funds.
The more of your pension you use to pay off your mortgage, the less income you have in retirement.
Pensions are subject to Inland Revenue guidelines and are therefore also subject to changes in legislation, which could affect your financial position.
Remember that the value of any investment can go down as well as up.
If an investment performs badly, it may not provide enough to repay the loan. It is your responsibility to make sure that you have enough to repay the loan at the end of the term.
Under Inland Revenue rules, a pension plan cannot be assigned as a security for a mortgage.
Even though a Pension Mortgage does not always require a life assurance policy, it is advisable to arrange one (at the very least "term assurance") to make sure that the loan can be repaid if you die. If you don't do this, the property may have to be sold in order to repay the mortgage.
Interest Only Investment-Linked Mortgages Explained
Investment-Linked Mortgages
With an investment-linked mortgage, you contribute towards an investment or savings plan, such as an ISA, which should build up a cash sum large enough to pay back the loan.
The type of investment plan may vary according to what is currently available in the financial market.
You can make two or more payments per month:
Interest on the mortgage + contributions to one or more investment plan(s)
Interest is paid to the lender. Contributions to investment plans are paid to the plan provider.
Important Points
You can contribute to investments of your own choice.
The investment plans may be 'assigned' to the mortgage.
Depending on prevailing regulations, you may be able to boost your investment plans with additional lump sum or regular contributions.
Remember that the value of investments can go down as well as up.
If an investment performs badly, it may not provide enough to repay the loan. It is your responsibility to make sure that you have enough to repay the loan at the end of the term.
Even though an Investment-Linked Mortgage does not always require a life assurance policy, it is advisable to arrange one (at the very least "term assurance") to make sure that the loan can be repaid if you die. If you don't do this, the property may have to be sold in order to repay the mortgage.
Straight Interest-Only Mortgages Explained
Straight Interest-Only
With a straight Interest-Only mortgage, you are in charge of your own investments.
You make one payment per month to the lender:
Interest on the mortgage
You make a commitment to repay the full loan amount at the end of the term, and manage your own funds to this end.
Important Points
Monthly payments are lower than with other mortgage types as they only cover interest on the loan.
You will normally be required to demonstrate that you will have enough money to repay the loan at the end of the term.
With a straight interest-only mortgage you will normally be required to take out a life assurance policy.
Even if the lender does not require life assurance it is advisable to arrange some (at the very least "term assurance") to make sure that the loan can be repaid if you die. If you don't do this, the property may have to be sold in order to repay the mortgage.
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