Repayment Mortgages

One of the benefits of a repayment mortgage, provided that you have maintained your payments, is that with the gradual reduction in the amount that you owe, you know that your mortgage will definitely be paid off at the end of the period you have chosen.

Your monthly payments pay two things: the capital - the loan itself - and the interest on the loan.
Repayment is typically over 25 years, although other periods may be arranged.
Over the course of the mortgage, the amount you owe falls until you've paid off the full amount you borrowed, including interest.
In the early years, the monthly payments predominantly repay interest, with only a little capital being repaid.

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Investment Mortgages

With an investment backed mortgage your monthly outgoings are split in two parts.

Part of your payment goes to pay the interest on the loan. In addition, you will make a separate payment into an investment plan, for example, an endowment endowment or an ISA.

Using an investment backed mortgage you might be in a position to pay off your loan early. Or you could choose to continue your payments as planned, build up more cash than you need to repay your loan and pocket the difference. However, if your chosen plan performs poorly or you stop your payments, it is possible that it will not be worth enough to cover the mortgage and you could be left with a shortfall, which you would need to make up yourself. Our current advice for new mortgages is to use an assumption of around 5% pa growth.

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Pension Plan Mortgages

Pension Plan mortgages are a popular option if you are self employed or not eligible to join a company pension scheme.

Advantage

Under current legislation it’s a tax-efficient way of buying your home while providing for your future. You will receive tax relief on your pension contributions, including those that pay for Pension Life Assurance at the level of your highest rate of tax.

Disadvantages

Not all of your pension investment will be available to provide a pension on retirement as you will be using some of it to repay your mortgage.

If you use part of your pension fund to repay your mortgage, you will reduce your income after retirement.

Inland Revenue limits on contributions to a personal pension plan mean that you may not be able to pay more into it if you increase your mortgage.

You cannot normally take retirement benefits before your 50th birthday. This gives you less flexibility if you want to repay your mortgage early.

The value of any tax benefits depends on your personal financial circumstances and may be affected by future changes in legislation. The value of of investments may fall as well as rise and is not guaranteed. Therefore, you may not be able to repay the mortgage at the end of the term.

If contributions stop in the early years, your fund may be less than the amount paid in.

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Interest Only

There’s no fund designed to repay the loan automatically, so you will have to pay back all the capital at the end of the agreed time from your own resources.

There are lower monthly mortgage outgoings as you only pay interest on the loan.

Warning

ISAs, endowments and pensions are medium to long-term investments. Their final value cannot be guaranteed and you may not get back all that you have invested.

Past performance is not necessarily a guide to future performance.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

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