Repaying a Mortgage

There are several different ways to repay a mortgage. Our independent financial advisors will be happy to explain the merits of each to you in detail. The main alternatives are:

"Capital and Interest" or "Repayment"
A repayment mortgage (also known as capital and interest mortgage) involves your monthly payments paying both the interest and part of the initial amount borrowed. The term of the mortgage can vary but provided payments are kept up-to-date, the loan will be paid off in full at the end of the agreed term.

You will normally require to take out a life assurance policy to pay off any outstanding amount of the mortgage in the event of your death before the end of the agreed term.

As time goes by, you reduce the amount which you owe to the lender and you may with some products be able to shorten the term of the mortgage by paying a lump sum or increasing monthly payments.

"Interest only" - Endowment
An endowment mortgage is different in that you only pay interest on the amount you originally borrowed to the lender, together with a separate monthly premium to an endowment life assurance policy which is invested on your behalf by the life assurance company and aims to pay off the amount you originally borrowed at the end of the term. Many people take out a with profits or unit linked endowment assurance policy. When the policy matures at the end of term, it is designed to pay off the amount you originally borrowed and you keep any surplus - tax free.

To get the full benefit of an endowment policy, you need to continue payments for the full term and once you have started a policy, you can take it with you each time you move, topping it up periodically to cover any additional mortgage if required.

"Interest only" - Pension
Usually available to the self-employed with their own pension schemes and employees with a pension scheme. Similar to an endowment mortgage, you pay monthly interest on the amount originally borrowed, together with a monthly contribution to a pension scheme. As well as paying off your mortgage on retirement, this method of repayment is designed to provide you with a pension. As with the capital and interest or repayment mortgage, you will require to take out separate life cover.

"Interest only" - ISAs
An ISA mortgage works in a similar way to an endowment mortgage in that you pay only interest on the amount borrowed while at the same time building up a savings plan known as an ISA which is designed to pay off your mortgage at the end of the mortgage term. As with the capital and interest or repayment mortgage, you will require to take out separate life cover.

An ISA is more flexible than an endowment as you can take money out of the plan during the term of the mortgage in order to pay part of it off and reduce your monthly interest payments. If an ISA does not grow fast enough, you may not be able to pay off your mortgage at the end of its term.

With endowment, pension and ISA mortgages, it is your responsibility to ensure that you are able to repay the mortgage at the end of the term. You must keep up payments to your chosen repayment vehicle and we strongly recommend that you arrange for regular checks to ensure that your plan is on course to have enough funds to repay the loan at the end of the term. This element of potential shortfall is the main reason for recent bad press surrounding some types of endowment policies. Our independent financial advisors will be able to advise you fully on any existing policies and the relative merits of all the foregoing repayment vehicles. to apply for an appointment.

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