Mortgage guide

Repayment only

Your monthly repayments consist of repaying the capital amount borrowed together with accrued interest. On your mortgage statement, normally received annually, you will see that the amount borrowed decreases throughout the term.

Advantages

Disadvantages

Interest only

Endowment

The most common type of interest only mortgage which also provides life assurance cover and a fixed payment for investment. These were very popular in the 1980s and 1990s. 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. These have been much criticised of late because when the plans were taken out people were promised high returns and perhaps a surplus on the amount of the loan because the stock market was roaring away. However, in the current low inflationary economy the stock market is producing much lower returns and some borrowers have found that their investment has not produced the levels of growth expected and they might find themselves with a shortfall when it comes to paying off their mortgage. Note: there is no guarantee 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 policy 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. If you cash in an endowment policy in the first few years after it is started you can receive less than the amount invested.

If you have an existing endowment and you want to move home your current endowments can be used to support a new mortgage. If the new house is more expensive then the extra cost - the %u2018additional lending%u2019 - over the value of the expected value of the endowment at maturity can be covered on a repayment basis.

Despite the recent problems it is worth remembering that historically the returns on endowment policies have been pretty good (as long as they go full term). Endowments provide life assurance so that in the event of death the mortgage is paid off.

ISA Plan

Here you invest in stocks and shares via an Individual Savings Account (ISA) - which is a tax-free method of saving. This is quite a complicated product so may not be suitable for most borrowers. Before considering this option you should consult with an independent financial adviser.

Pension Plan

Life assurance cover is provided and monthly payments are made into a pension fund - which has tax benefits. 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

Disadvantages

For information on different kinds of interest rates - such as fixed, capped, discounted and tracker click here.

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