Mortgage Repayment Options

Commodore Finance Ltd

There are essentially two different types of mortgage:

· Repayment (capital and interest mortgage)

· Interest only (ISA, pension or endowment mortgage)

Your repayments consist of repaying the capital amount borrowed together with the interest. On your mortgage statement, with this type of repayment option you will see that the outstanding balance decreases throughout the term.

Advantages

· At the end of the term, you have the peace of mind that the total amount borrowed has been repaid.

Disadvantages

· There may be financial penalties for making lump sum/overpayments into your mortgage account. In the early years of a repayment mortgage the majority of the monthly repayment is interest rather than capital. For borrowers moving house regularly, this can result in little of the capital being paid off.

· If you have no life assurance cover in place and die before the loan is repaid, the mortgage will still need to be repaid. This may result in the property having to be sold to repay the debt owed. It is therefore of great importance that you check you are adequately covered.

Interest only

With this option the mortgage payment is only used to pay off interest. At the same time, the borrower takes out an alternative ‘repayment vehicle’ (method of paying off the mortgage) such as an ISA, pension plan or endowment policy. The most significant factor regarding an interest only mortgage is that the monthly repayments do not repay any of the outstanding capital balance. At the end of the mortgage term if you borrow £100,000 yui will still owe £100,000. As a consequence it is important that the payments are maintained into the repayment vehicle; otherwise it will not be possible to pay off the mortgage at the end of the term.

This is the most common and heard of type of interest only mortgage which provides life cover and a fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that, at maturity, the amount invested and earnings are sufficient to pay off the mortgage. There are no guarantees that, when the endowment matures and ‘pays out’, the balance will be sufficient to repay the mortgage.

Nonetheless millions of borrowers have one or more endowment policies and as a rule of thumb, these should not be cashed-in early and certainly not before seeking advice from a suitably qualified financial adviser.

Endowments provide life assurance so that in the event of death the mortgage is paid off.

The Individual Savings Account is a completely tax-free saving method. Using an ISA as a repayment vehicle is growing in popularity but due to the ISAs complexity it is only for the financially sophisticated or borrowers taking advice from a suitably qualified financial adviser.

Life assurance cover is provided and monthly payments are made into a pension fund. When the benefits are eventually taken, the mortgage is repaid using tax-free cash from the remainder of the fund. The plan holder can then draw a pension from the balance of the fund. This product, which tends to be used by the self-employed, is only for those taking advice from a suitably qualified financial adviser.

Advantages

· If the proceeds of the plans exceed the amount required to repay the mortgage, then this is received as a cash lump sum by the borrower.

Disadvantages

· If the proceeds of the repayment vehicle do not achieve the amount expected, then there will be a shortfall, which the borrower remains liable for. Regular checking of the policy fund itself by the borrower and the lender should minimise any risk. If the plan is not reaching its expected target, the borrower can increase payments into the policy or invest in another product to cover any anticipated shortfall.

· Cashing in the plans early may result in financial penalties. The lenders have no way of tracking some of the more modern repayment vehicles, such as an individual savings account, which will result in some instances where a borrower lets an investment lapse forgetting or not realizing it is to be used to pay off the mortgage. This will result in there being no method of paying off the mortgage.

Top

This calculator is for guidance purposes only, figures may differ according to your personal circumstance.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

We do not normally charge for mortgage advice, however this will depend on your circumstances. If a fee is charged our typical fee is £99.

Commodore Finance Limited is an Appointed Representative of Personal Touch Financial Services Limited which is authorised and regulated by the Financial Services Authority

Terminology explained