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| Repayment |
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Repayment is the traditional means to
pay back a mortgage – you make payments every
month, part of which goes towards repaying the money
you have borrowed – the capital – and part
of which pays the interest on the loan (also known as
capital and interest mortgage). Instalments remain the
same each month, changing only as the Bank of England
interest rate rises or falls and lenders’ interest
rates follow suit. The advantage of a repayment mortgage
is that provided you have kept up with the monthly payments
you are guaranteed to have paid off the loan by the
end of the mortgage term.
In the early years of a repayment mortgage, more of
the instalment goes on paying the interest than the
capital. Over time, as more of the capital is paid off,
so the amount of interest reduces until the total loan
has been paid back.
Since you will be paying back both capital and interest,
monthly payments to the lender on repayment mortgages
tend to be higher than for interest-only loans. But
interest-only loans also require payments into an investment
plan such as an endowment, a pension or an individual
savings account (ISA). |
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| Interest-only |
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With an interest-only mortgage you do
not pay back any of the capital until the end of the
mortgage term. You pay the lender interest on the loan
each month.
Repayment of the capital is usually covered by long-term
payment into an investment scheme, designed to have
accumulated sufficient returns by the end of the term
to pay off the loan – and even to have grown to
give you a surplus lump-sum payment too.
There are various types of investment schemes used to
cover an interest-only loan: |
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| Endowment |
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With an endowment mortgage you pay interest
on the loan to the lender and premiums into an investment
plan. These plans are usually run by insurance companies
and include life cover. They are designed to pay off
the capital at the end of the mortgage term or if you
die within that term.
However, much depends on the performance of the fund
into which your monthly payments are invested. Many
people who took out endowments during the 1980s when
stock markets and percentage returns on investments
were high, have found that the low returns of the 1990s
and since have left them with a current shortfall and
the possibility that the endowment will not meet the
payment of the loan at the end of the mortgage term,
let alone provide them with a welcome lump sum over
and above that. |
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| ISA |
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| With and ISA (individual savings account)
mortgage you pay the interest on the loan each month
and invest in an ISA, the casing in of which pays off
the mortgage at the term-end. ISAs have the advantage
of a number of tax benefits but there is a limit on
how much can be invested into an ISA each year. ISAs
can be invested in the stock market, life insurance
policies and cash. |
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| Pension |
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These are available to the self-employed
and those contributing to a personal pension plan but
not as part of company schemes.
With pension mortgages the capital sum remains outstanding
for the length of the loan, on which you pay interest.
Payment of the loan is met at the end of the term from
the pension plan.
The advantage of a pension mortgage is that you can
claim tax relief on any contributions made to the pension
plan. The disadvantage is that you are paying for your
home loan until you retire, setting your retirement
age in advance. You are also using part of your pension
to pay for your mortgage. And only 25 per cent can be
taken as a lump sum – the rest must be used to
purchase an annuity. |
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