Repayment Methods
Methods of repayment of a mortgage fall into two main categories. One
is where you pay capital and interest off either weekly fortnightly or
monthly, whichever you decide suits you best. When the loan is calculated
by the lender the payment includes capital and interest payments. What
this simply means, at the end of the agreed term of the loan you have paid
off all the money providing that is you have not fallen into arrears at
any time. The second payment method is an interest only loan and the payments
made each month are the interest payment only with no deduction from the
capital sum. This second method requires a repayment vehicle such as an
endowment policy, pension plan or ISA in place to pay off the capital sum
at the end of the term. We are not licensed to sell regulated insurance
products but are able to provide you with external, independent financial
advice should you require help in obtaining this type of repayment vehicle.
Endowment
It refers to an INTEREST-ONLY mortgage where an endowment policy is earmarked to repay the capital at the end of the mortgage term. The same applies to "PENSION & PEP mortgages". Different lenders take varying degrees of interest in the endowment policy itself. The trend is for lenders NOT to take assignments on the policies, but to treat borrowers as responsible adults who will make adequate provision to repay the mortgage at the end of the mortgage term.
Capital Repayment
The payment on this type of mortgage is usually paid monthly. The payment includes two elements, which are part of the capital you have borrowed (i.e. the mortgage loan) and the repayment of the interest on the outstanding balance.
The monthly payment is calculated taking both the payments of the Capital and Interest into consideration. From this a monthly figure is calculated.The repayment is recalculated every time there is a change in the interest rate for those on standard variable rate.
In the early years most of each payment goes towards paying the interest and a smaller part goes toward paying off the Capital and in the last years all goes to paying off the balance of the loan as the interest reduces over the term as the capital balance diminishes.
The size of the payment you make each month is dependent on the size of the loan, the number of years the mortgage is taken over and the interest rate.
Interest Only
An Interest Only Mortgage is quite simply repaying monthly, the interest on the loan.
The Capital is repaid to the lender at the end of the loan period and not during, as with a Capital and Interest Repayment Mortgage.
The lender in most cases will grant this sort of loan on the condition that clients have an investment plan that will repay the Capital at the end of the loan period.
It is the clients responsibility to ensure that one is in place and maintained throughout.
At the end of the period of the mortgage the lender will demand repayment of the Capital. If you cannot repay the Capital at that time, the lender will take steps to recover it.
This could lead to clients having to sell their home to repay it.
ISA
These are tax-efficient accounts where individuals can place either shares,
cash or life insurance or a combination of these up to a limited value.
This type of account replaced PEPs (Personal Equity Plans).
Your home may be repossessed if you do not keep up repayments
on your mortgage.
A fee may be charged for advising on or arranging mortgages of between
1 and 3% of the sum borrowed. The exact amount will depend upon your circumstances
but we estimate it will be 1% of the loan amont.
