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Mortgage - Mortgages: Repayment and Interest Only Mortgages Mortgage lenders provide many including varied plans but in the main these may be divided into 2 groups. A) The Repayment Mortgage (Capital including Interest Mortgage) The concept is simple. Over a particular agreed duration of years the borrower makes regular monthly payments comprising capital including interest so that at the end pertaining to the term the mortgage is paid off. The agreed duration is often 25 years but the may vary according to the amount the borrower might afford to pay. As in all loan transactions, the higher the monthly repayments the shorter the duration pertaining to the loan. Main Advantages of a Repayment Mortgage 1) It is a simple concept to understand. 2) The borrower might see that the amount borrowed is being reduced including is assured, provided payments are kept up to date, that the full loan could be repaid in the prescribed term. 3) As the balance is reduced it is simple to arrange any additional top-up loan against the increasing equity. the would, of course, be subject to the usual status requirements. 4) It is a particular ideal option for those who are wary pertaining to the investment market, including who may be disturbed by the adverse publicity given to such plans as endowment linked mortgages during the last decade. 5) Low cost life cover may be obtained to pay off the outstanding balance pertaining to the loan in the event of death. Because the amount of cover reduces as the balance is reduced, the might be a very inexpensive form of cover requiring low monthly premiums. 6) The plan has a certain amount of flexibility built in. For example, if the borrower experiences financial difficulties, payments may be reduced including the duration extended. Main Disadvantage of a Repayment Mortgage 1) Life assurance does not automatically form part pertaining to the package including separate protection could need to be taken out. B) The Interest only Mortgage With the type of mortgage the borrower pays interest only by monthly instalments over a particular agreed duration of years. At the end pertaining to the duration the capital sum borrowed is repaid. the is achieved by taking out a long term investment product such as a ‘with profits’ endowment policy, a unit linked life assurance plan or a linked personal pension plan at the time the mortgage is taken out. Of these, by far the most popular has been the low cost endowment linked mortgage. Included is a form of life cover to repayment the loan at any time during the term in the event pertaining to the death pertaining to the borrower. In recent times the particular plan has come in for some criticism as many insurance/investment companies have realised that the investment performance has not been sufficiently strong to realise the amount required to settle the loan at the end pertaining to the term. They have been forced to inform their customers that it could be necessary to increase their monthly premiums in the hope of achieving the desired return. Even then, it absolutely cannot be guaranteed. Main Advantages pertaining to the Interest Only Mortgage 1) If the investment vehicle (e.g. Endowment Policy) over achieves including realises at the end of term more than is required to pay off the loan ,the balance is paid to the policy holder free of tax. 2) For the young borrower taking out a long term mortgage the insurance premiums might be relatively low and, as the monthly repayments are made up of interest only, the total monthly repayment may be less than that for the equivalent repayment mortgage. 3) Some personal equity including personal pension plans provide attractive taxation benefits. 4) Life assurance usually forms part pertaining to the package. Main Disadvantages pertaining to the Interest Only Mortgage 1) Few long term investments could give you a guarantee as to the maturity value at the end pertaining to the term. the makes it virtually impossible to predict whether or not there could be sufficient to repay the outstanding loan. 2) There is absolutely no reduction in the capital sum owed throughout the term. 3) Some schemes are complicated including not readily understood. 4) In the event of financial difficulties, the payments absolutely cannot be spread over a particular extended duration including repayments may not be reduced. 5) In the light of recent adverse publicity given by the media to endowment mortgages the may not be suitable for those with a particular aversion to risk. Before making a final decision on a mortgage, it is always better to seek professional advice.
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