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What type of Repayment suits my needs?
The
repayment of your mortgage can be based on four different repayment
systems:
-
Annuity
- Endowment
- Split
- Pension
1. Repayment / Annuity
This
is the most straightforward type of mortgage, where you pay
back capital (the original amount of the loan) and interest
each month.
Over
the agreed term of years of the mortgage, you pay back the
money you have borrowed and when you make your last repayment,
the property is yours. In the early years, the amount of the
capital you repay each month is low because most of the payment
is interest.
As the term is reducing, the amount you owe reduces as well
and interest becomes a smaller part of the monthly repayment.
The current income tax law allows you to receive tax relief
on your mortgage interest.
With this type of mortgage you can pay off part, or all, of
your mortgage at any time, if you are on a variable interest
rate.
If your circumstances allow, you can increase your monthly
payment, thereby paying the loan off earlier and saving yourself
interest. This can be done whether you are on a fixed or variable
rate. If you choose to pay off part of your mortgage, you
can decide to either reduce the term of your mortgage or your
monthly repayments.
However, if you choose a fixed rate term mortgage, you must
wait until the fixed rate period is up before paying off part
of your mortgage.
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2. Endowment
Endowment
mortgages are not as popular as they used to be but are particularly
suited to residential investment or commercial loans.
With this type of mortgage you make two regular payments:
One to the to pay interest on your loan, and one to an
insurance company to buy an endowment policy (savings and
life assurance contract), which is a type of insurance policy.
You do not make any payments against the capital borrowed
- it remains the same for the period of the loan.
The endowment policy includes enough life assurance to pay
off your loan, if you die, during the term of the loan.
At the end of the mortgage, the proceeds of the endowment
policy should be enough to repay the capital in full. However,
if on maturity, the endowment policy is worth more than the
capital borrowed, you will receive the surplus cash.
BACK TO TOP 3. Split
With
this option you can have the best of both worlds.
Under this option you can fix the interest rate on a proportion
of your loan while the remainder will be at the variable rate.
BACK TO TOP 4. Pension
Pension
Mortgages operate in a similar way to Endowment Mortgages
but are only available to people who are self-employed or
those not in a group pension scheme.
With a Pension Mortgage you make a regular payment to
to pay the interest only, and a monthly repayment to a pension-type
policy.
This pension policy must be set up in such a way as to ensure
a lump sum payment (at the start of the pension period) sufficient
to repay the loan in full.
With a pension mortgage you must also have level term assurance.
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