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Make
finding the right mortgage less scary
Mortgages can be confusing, since
there seem to be so many different types of home
loans available. However, with a little homework,
it is possible to gain a sound working knowledge
of the subject and an understanding of the terminology.
Even armed with this information
it makes sense to talk to a professional mortgage
adviser. With the number of mortgage choices available
– well over 1,000 different deals (which
are constantly changing), from over 100 lenders
– an independent financial adviser (IFA),
who is registered with the Mortgage Code Compliance
Board, is well placed to help you select the type
of mortgage that best suits you. Such an IFA should
have access to most, if not all, of the latest
mortgages (including many that aren’t available
through high street lenders), and can provide
invaluable assistance in highlighting potential
pitfalls.
However, to help you make sense of the mortgage
market we have prepared a brief description of
each type of mortgage, with handy summaries.
Right at the outset it is important to understand
that there are two facets to a mortgage: how the
loan is repaid; and how interest is charged on
the debt. Get this clear in your mind, and logically
everything else should fall into place.
Repayment
or interest only mortgage?
There are two basic ways of paying off a mortgage:
repayment and interest-only (backed by a separate
investment):-
Repayment
mortgage
With a repayment or capital and interest mortgage,
you pay your lender a monthly sum, which is partly
repayment of the outstanding debt and partly interest
on the outstanding loan. Month by month the debt
reduces.
Every time you move home or remortgage,
you have to take out a new loan, and start your
repayments from scratch.
However, providing you make all
your monthly payments in full, the loan will be
paid off at the end of the agreed term (which
is usually 25 years, but could be longer or shorter).
Pluses:-
· Easy to understand.
· Loan guaranteed to be repaid if all payments
made.
Minuses:-
· Very little capital is repaid in the
early years of the loan.
· Monthly payments higher than for an interest-only
mortgage.
· You’ll need to arrange separate
life assurance.
Interest
only mortgage
As the name suggests, you simply pay interest
to the lender during the course of the loan. Your
debt never reduces and at the end of the agreed
mortgage term you owe your lender exactly the
same sum as at the outset.
Monthly payments to your lender are lower than
for a repayment-type mortgage, but you will have
to clear the debt at the end of the term.
In order to pay off your mortgage you will normally
have to make payments into a separate investment
plan, which is designed to build up sufficient
funds to repay the loan in full. You have a number
of choices of investments, some of which are outlined
in the following pages.
Endowment
policies
An endowment is an investment plan with built-in
life assurance (which will pay off the loan if
you die before the end of the mortgage term).
If the funds perform well, it may be possible
to pay off the mortgage in advance of the expected
date. Conversely, if the funds do not perform
well you may still have a ‘shortfall’
when you have to repay your mortgage.
With-profits
A life assurance company invests your premiums
on your behalf. Each year annual bonuses can be
added to your fund, and once awarded they can’t
be taken away. At the end of the term a one-off
terminal bonus may be added to produce a final
payout.
With-profits policies aim to produce steady growth.
The ultimate value of a with-profits investment
is dependent upon the level of future bonuses,
if any, and cannot be guaranteed.
Unit-linked
Your premiums buy units in funds, normally invested
in the stockmarket. The prices of units are published
daily, so you can find out exactly how much your
fund is worth.
The value of your investment may go down as well
as up.
Unitised
with-profits
Your premiums buy units in a
with-profits fund.
An endowment policy is designed
for the long term but should your circumstances
change, seek independent advice before you cash
in your endowment as there are alternatives that
may be more suitable for you. If you want to alter
your endowment or if you have any potential ‘shortfall’,
an IFA can advise you on what to do or even recommend
an alternative source of mortgage repayment.
Pluses:-
· May pay off your mortgage
in advance of the expected date if funds perform
well, and therefore save future mortgage
interest payments.
· Built in life assurance.
· Tax efficient.
Minuses:-
· Rely on investment performance.
· Potential ‘shortfall’ in value
of fund when mortgage is due to be repaid.
· May have to make additional investments
to build the required lump sum to match the outstanding
mortgage amount.
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