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Mortgages come in many shapes and sizes these days. Despite the financial crisis and bank crashes of 2008-9, the lending for property market remains vibrant and competitive, although lending rules have been tightened up from the days when ‘sub-prime’ mortgages precipitated the credit crunch.
When you’re considering taking on a mortgage, you will have a choice of a number of different types of repayment scheme. All are fairly straightforward, but with such a big financial commitment – the biggest of most people’s lives – it’s incumbent on the borrower to do some serious research and if they feel it necessary to seek out independent financial advice.
These are the broad types of repayment most commonly available.
Capital and Interest repayment
This is the standard mortgage. You repay interest and the sum loaned in monthly repayments over an agreed time period, paying off the loan in full. Monthly payments may change during the term of the loan as interest rates change or if you re-mortgage to switch lender or find a new deal.
The main sum loaned is not reduced at all as you only pay the interest on the loan. Of course, the monthly payments are much lower than those for a capital and interest mortgage, but it is expected that you will make arrangements to pay off the loan sum at the end of the mortgage.
The final payment is usually facilitated with one of these schemes:
An endowment policy is a type of life insurance that pays out a lump sum at the end of a long term. Regular payments are made into the fund. While some endowments do offer a guaranteed payment, they will not always pay off the whole of the mortgage capital if the investment fund performs poorly. They will also pay out to your dependents if you die during the term of the policy. You may also wish to sell my house fast in such a scenario otherwise.
These policies have proved controversial recently, as many mortgage borrowers face shortfalls in paying off their mortgages. They are now less common as a form of mortgage repayment plan.
Pensions usually pay out a tax free lump sum on retirement and by paying in extra money that is saved by only paying interest on your mortgage they can be used as a vehicle for saving to pay off mortgage capital.
Individual Savings Accounts offer tax free savings – up to an annual limit – and can be taken out every year. They are a popular vehicle for saving towards a mortgage repayment.
Lump sum repayments
You can pay off capital during your interest only mortgage’s term by making occasional lump sum payments.
Some people use interest only mortgages to buy properties as investments, counting on property prices rising enough to pay off the capital sum and provide a profit.
Part repayment, part interest only
You can mix the two types of mortgage with the agreement of your lender. This is popular when an endowment policy doesn’t look like meeting the full capital repayment or if a large sum – perhaps an inheritance – is expected by the borrower in the future.
Martin Ryan has written a number of articles on personal finance. He has done so for a number of businesses. In his own time he likes to jog and keep fit.