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Mortgage Guide
How do they work?
You the borrower pay the lender a monthly amount, which repays part of the debt and part of the interest on the loan. If you pay all your monthly instalments in full, your mortgage will be paid off at the end of the agreed term, which is typically 25 years.
The advantages are that you are certain to clear your debt as long as you keep up your monthly repayments and this type of mortgage is very simple.
The disadvantage of repayment mortgages are that your monthly payments are likely to be higher than for an interest-only option, and that only a small amount of the capital is repaid in the early years. To protect against the possibility of being unable to repay the loan in the event of death, it is advisable that you take out separate life assurance.
Interest-Only Mortgages
How do they work?
With an interest-only mortgage, you just pay the lender interest on your mortgage for the duration of the loan. In effect, this means that your debt never actually decreases, and at the end of the loan period you owe the same as when you started.
To pay off your mortgage you still need to make payments into a separate investment plan throughout the term, the idea being to save a fixed sum which will be enough to repay your loan in full.
Mortgages linked to investments may have built-in life assurance. However, since any investment involves an element of risk, it is important to note that you may face a shortfall at the end of your loan period.
Which investment plan should I choose?
There are a number of various investment opportunities open to you. Here are some of the most popular interest-only mortgage re-payment plans you will come across:
Unit-linked Endowment policy
An investment plan with life assurance included so that any outstanding debt will be paid off should you die. The plan is designed to repay an interest-only mortgage from the maturity value of the plan. The value of the plan will, however, depend on investment performance.With-profits Endowment policy
This plan involves a life assurance company investing your premiums, with bonuses paid to your fund each year that can't be taken away. Steady growth is the objective, and at the end of the term another bonus may be added to produce a final pay out. The level of future bonuses govern the success of a with-profits plan, and these cannot be guaranteed.Unitised with-profits
Here the money you pay each month is used to buy units in a with-profits fund. Again, there is no guarantee of bonuses and you may face a shortfall at the end of the term.Unit-linked Endowment policy
A plan usually allied to stockmarket investment, where your premiums are used to buy units in funds. Every day, the prices of these units are published so you can check the performance and see what your fund is worth. As with any investment, the value could fall as well as rise.
What other ways are there to repay my mortgage?
PEPs, and ISAs
Prior to 5 April 1999, you could use a Personal Equity Plan (or PEP) to help with your mortgage repayments. Indeed, if you have an existing PEP, you may still do so. To gain the same beneficial tax treatment (i.e. avoidance of capital gains tax on any profits from your investments), you can currently use an Individual Savings Account (ISA) for the same purpose.
Once more, these plans offer the chance of high investment growth. However, you will also need to think about separate life assurance and possible negative fluctuations in the investment market which may result in a shortfall of your repayments.
View information about the ISAs and other investment opportunities Daai Financial offer.Unit Trusts, Investment Trusts, Shares, Inheritance
Any of these can be pay off an interest-only mortgage, but you should be confident of their ability to clear the debt at the end of the term.
Why it pays to take an interest in Interest
All mortgages involve the paying of interest to the lender. Since this interest is paid over the length of the loan period, it pays to be aware of exactly how the interest you pay will be calculated. Some of the options include:
Variable rate
A mortgage taken with a variable rate will mean your monthly repayments can go up and down. This is because the interest is usually linked to bank base rates, plus the rate at which each lender is prepared to lend money, which rise and fall in accordance with a number of factors. A fall in interest rates will see you paying less each month, whilst a rise will have the opposite effect. Most lenders offer a 'standard variable rate' which can differ between lenders.Tracker rate
As with variable rate, but is directly linked to the Bank of England base rate - a margin above or below.
For more information on our Tracker Mortgage, visit our tracker mortgages section.Fixed rate
This type of mortgage removes the uncertainty of variable interest rates and promises a stable rate for a fixed period. Typically, people choose to fix their mortgage rate for between 2 and 5 years, so that they know where they stand in terms of their monthly repayments.
As a general rule, the longer the fixed term the higher the rate of interest.
The downside to choosing a fixed rate mortgage is that, should variable rates fall, you could be paying more than average. You may also face an early redemption charge if you decide to switch your mortgage before the fixed term ends. This fee could amount to several months' interest.
For more information on our Fixed Rate Mortgage, visit our mortgage information section.Capped mortgage
Capped rate mortgages can be thought of as a half way house between the variable and fixed rate options. For budget-minded people, there's the advantage of knowing that the interest rate won't exceed a given ceiling (or 'cap') for a specified number of years. Yet if the variable rate offered by the lender should fall, so would your rate - reducing your monthly payments as a result. Sometimes, a minimum rate of interest is also stipulated, below which your interest rate will not fall.Discount mortgage
This is a mortgage which offers a reduction in the lender's variable interest rate for the first period of the loan (often 1 or 2 years). Discounted rates can help reduce initial monthly repayments - useful if you're just stepping onto the property ladder, for instance - but there is no reduction in the overall repayment.'Cashback' mortgage
Sometimes, borrowers are offered a variable rate mortgage with a 'cashback' element. This usually takes the form of a lump sum cash payment (calculated as a percentage of the loan) made instantly available to you and repayable when the mortgage completes. It's a useful way to unlock some cash to help with the expense of moving in to a new home. It is likely, however, that you will have to repay this cash if you redeem the mortgage within a specified period.Current account mortgage
A current account mortgage (CAM) allows you to combine a range of personal finances through one account. Simply speaking, your mortgage, current account, investments, credit cards and personal loans are combined in a single account with interest applied at the mortgage rate. This can be an attractive option, since the mortgage rate can be higher than savings rates. Any money which would usually be held in your savings or current account is used to offset against your borrowings. You're paying less interest and your money works harder. The drawbacks are that all your money is directed into your CAM (which reduces your choice) and that some CAMs have restrictive entry.
For information on all of our flexible mortgages, including our Current Account Mortgage, visit Flexible Mortgages.Offset mortgage
This is similar to the CAM mortgage except that your mortgage, your savings and your current account are kept as distinct entities. Saving and borrowing rates are offset against each other, but you have a clear view of the different pools of money. It's a good way to 'streamline' your finances and enjoy higher interest rates on your savings. That said, the same drawbacks that apply to CAMs also apply to the offset mortgage.
Because there are so many mortgage options to choose from, why not let us start searching the best deals for you - click for a quote.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Daai Financial Independent Tailoring is a trading name of Daai Independent Financial Services Limited which is authorised and regulated by the Financial Services Authority. This can be checked on the FSA Register by visiting its web site at www.fsa.gov.uk/register.
Daai Independent Financial Services Limited. Company No: 4132605 registered in England at Shurdington Road, Cheltenham Spa, Gloucestershire GL51 4UE.