Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Comparing Repayment Methods

Repayment mortgages

With a repayment mortgage the loan is certain to be repaid at the end of the term, as long as the repayments have been maintained. It is also more flexible than an endowment mortgage if the borrower gets into financial difficulties and wishes to suspend payments of both interest and capital. A repayment mortgage generally involves a lower monthly outlay than the endowment method when interest rates are relatively high, taking into account the cost of life cover. Repayment mortgages are therefore for borrowers who want a conservative approach, do not necessarily need life cover and may require flexibility.

Advantages

  • Simplicity
  • Lowest risk
  • Lowest total interest repayment
  • Most flexible

Disadvantages

  • No chance of a lump sum
  • No built-in life cover
  • If you move, you may have to take out a new loan, with a new repayment term

Endowment mortgages

Endowment mortgages may be attractive for those who want to see a return on their repayments at the end of the mortgage term and are prepared to take the risk that the fund will not be enough to cover their capital debt. Borrowers should need life cover and may also want to add on inexpensive critical illness insurance as well.

Advantages

  • Tax free cash surplus if policy overperforms
  • Built in life cover
  • Attractive when base rates are low
  • Fully portable when you move
  • Various types of policy to suit different attitudes to risk

Disadvantages

  • Potential for shortfall if policy underperforms
  • Forced to take life cover
  • Unattractive when rates are high
  • Expensive to cash in early
  • Can't extend the term - must increase payments if you borrow more
  • High fees and charges are hidden in the policy payments

Pension mortgages

Pension mortgages generally involve a higher monthly outlay than either of the above, though they are comparatively cheaper for the higher rate taxpayer. In general, they are more tax-efficient and should produce a higher return on investment than endowment mortgages. But they are more complicated to understand and the borrower has to qualify. They are therefore most likely to be suitable for the more sophisticated 40% tax paying borrower.

Advantages

  • Tax relief on contributions
  • Underlying fund gets tax breaks
  • Tax relief on pension-related life assurance
  • Option to contribute more than your monthly payments
  • Potential for tax free lump sum over and above your mortgage debt

Disadvantages

  • Not everyone qualifies for a personal pension
  • Limits on contributions
  • Need to accumulate four times your mortgage debt
  • Cannot take the benefits until retirement - long time to pay interest on the loan
  • Can be complicated to understand

ISA mortgages

An ISA mortgage should provide a higher return than an equivalent endowment because of the tax advantages of an ISA. Furthermore, most borrowers qualify. The monthly outlay may well be lower than any of the above variants, and the ISA payments can be stopped and restarted with fewer financial penalties than many other products. An ISA might be considered a more volatile product than an endowment.

Advantages

  • Lower required contributions for same loan than other interest-only investment vehicles
  • Possibility of investment overperforming
  • Lower charges and fees
  • Less penalised for switching investment vehicle
  • Choice of investment format to suit risk attitude
  • More flexible payment terms than endowments or pensions

Disadvantages

  • Annual contributions limited to £5000. Can make it difficult to repay high value loans quickly
  • Possibility of investment underperforming
  • Vulnerable to poor investment decisions
  • Vulnerable to stock market fluctuations
  • Only guaranteed to exist until 2009
  • No built-in life cover