The most straightforward form of mortgage repayment with capital and interest paid off monthly from day one. It works just like an ordinary personal loan except over a longer term.
In the early years, you repay mostly interest, with a smaller proportion of the payment being made against the loan. Over time, however, this ratio changes with the proportion of capital repayment increasing and interest reducing until the loan is paid off.
It is simple, straightforward and easy to understand. Unlike with other mortgages, there is no risk associated with investing in the stock market. You are guaranteed to have the loan repaid at the end of the term provided all payments are met.
Unlike with other mortgages, repayment loans do not give you the opportunity to benefit from a rising stock market. Also, when moving house, people usually take out a 25 year repayment mortgage each time to help keep monthly costs down. This extends the period for repaying the debt.
Endowment Mortgage
Your monthly repayments only cover the interest on the amount you have borrowed. You must also take out an endowment policy with a Life Assurance Company to which you make separate payments. In theory, at the end of the term of the loan the proceeds of the life assurance policy should be sufficient to clear the principal amount borrowed.
It is important to note that there is no guarantee that all life assurance policies will clear the principal amount owing at the end of the term of the loan. With an endowment mortgage it is advised that you contact your life assurance company from time to time to monitor its performance throughout the term of the loan.
The policy is very flexible and can be maintained if you move house or change mortgage provider. Endowments can include some kind of life and critical illness cover, and can be cheaper than buying such cover separately. If the underlying investments perform well, you may get more than is needed to pay off the loan.
If the stock market is under performing your policy may not make enough money to cover the loan at the end of the term. In order to ensure that the mortgage loan is repaid in full at the end of the agreed term you must ensure that the amount you pay into the policy is sufficient to ensure a return on your investment that will cover the remainder of the loan.
Pension Mortgage
This type of mortgage is usually offered to individuals who are self-employed. You make monthly repayments of interest on the loan to the lender. Additionally, you make contributions to a personal pension, which will provide a tax-free lump sum and taxed regular income upon retirement. Most, if not all, of the lump sum is used to clear your mortgage loan at that date.
Using your lump sum to clear the mortgage may leave you with inadequate income in retirement. Also, the lump sum is payable upon retirement, so your loan term may be more than 25 years. Poor investment performance may adversely affect the amount of the tax-free lump sum, leaving insufficient funds available to repay the loan at the end of the agreed term.
