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 Generic Repayment Methods ~ Types of Mortgage ~ Mortgage Broker Help

INTEREST ONLY

Interest Only have become common types of mortgage ~ but also remember an Investment plan !

With interest only, your monthly payments only cover the interest due, making no payment towards the capital. For these types of mortgage you need to arrange a 'repayment vehicle', which is normally a monthly investment, that will provide the necessary funds to repay the capital in full at the end of the mortgage term. Interest only mortgages can be useful if you are expecting a lump sum payment at the end of the mortgage term.
Most borrowers set up an investment vehicle into which they make regular payments. Eg; endowment policies, (ISAs), pension plans. Your monthly repayments to your lender can be significantly less. However, you may not have enough funds to repay the capital at the end of the mortgage period, as investments can go down as well as up. You may also need to consider a level term life/critical insurance cover.

CAPITAL & INTEREST

 The benefit of these types of mortgage ~ is that you do see your mortgage reducing

With a capital & interest or repayment mortgage you make a payment every month to the mortgage lender which includes both interest on the mortgage and a portion of the capital. Over time the capital decreases in size, thereby reducing the amount of interest payable, so more of your payments can be channelled into paying capital.

The benefit of these types of mortgage, is that with a capital & interest or repayment mortgage, you can be sure your debt will be cleared by the end of the term, providing you maintain the repayments throughout. For this type of mortgage you may also need to consider a reducing life/critical insurance cover.

MORTGAGE INVESTMENT REPAYMENT 
ISA

An ISA is one of the most tax efficient types of mortgage investments

Individual Savings Accounts maximum contribution is currently £7,000, of which not more than £3,000 can be held as cash and not more than £1,000 can be paid as life insurance. The Government let the ISA take over from PEP's in 1999 but their long term certainty is unknown for the repayment of a mortgage at the end of term.

These types of mortgage requires the borrower to take out a level cover life/critical insurance cover to help provide a lump sum to repay the mortgage in the event of death/critical illness.

MORTGAGE INVESTMENT REPAYMENT
PENSION

A Pension could repay both your mortgage & give you an income at retirement

These are less popular types of mortgage repayment than the other two detailed, the pension policy needs to be large enough for the 25% tax-free lump sum available at retirement date to repay the mortgage [usually 75/80% of the projected maturity is lent against]. Note that apart from clearing the mortgage, it will pay a monthly pension also when the mortgage is cleared. Pensions have become more flexible since pensions A-day 2006

In addition, for these types of mortgage, the borrower will need to take out life/critical insurance cover to repay the mortgage in the event of early death.

MORTGAGE INVESTMENT REPAYMENT
ENDOWMENT

Endowments have been the most controversial types of mortgage repayment

Endowments are the most controversial types of mortgage repayment plans due to the Stock Market crash of late 90's early 00's & then subsequent press follow up. These life assurance policies usually run the term of the mortgage or on the earlier death of the life assured. During the plan term, the planholder pays a regular monthly/annual premiums. The benefits of these types of mortgage policy is that the mortgage may be repaid if the life/lives assured dies earlier but as unfortunately many consumers have found out - there is no guarantee of repayment at maturity!  

Endowment policies provide both a savings plan & life/critical illness cover for purposes such as paying off a mortgage. There are usually 3 types of mortgage Endowment policy; low cost, full with-profits or unit linked.