Mortgage Advice: Mortgage Options
What types of mortgages can I choose from?
There are three kinds of mortgage you can opt for:
Repayment,
Endowment, and
Pension.
Repayment Mortgage
This is the most popular mortgage and is also known as an annuity mortgage. Your monthly repayments cover the interest due on your borrowings, plus a portion of the actual amount borrowed - or "principal". In the early years, your repayments are mostly made up of interest. As the years go by, you will pay less interest and more principal until eventually your entire loan will be cleared.
Endowment Mortgage
This is an interest-only mortgage. The principal, or the mortgage amount, is repaid by taking out a policy with an insurance company. Each month, you will make two payments - one to cover the interest on the loan, the second to cover the premiums on the insurance policy.The endowment policy is designed to repay the principal at the end of the agreed term. Remember that these policies do not guarantee repayment of the mortgage. There is a possibility that there could be a shortfall. The eventual value of the policy will depend on the performance of the fund over the period of the mortgage.
Pension mortgage
This is an interest-only mortgage, with the principal being paid off through a pension plan. It is only an option for someone who is either self employed or in non-pensionable employment. A personal pension plan is set up at the start to pay a tax-free lump sum on retirement in addition to a monthly pension income. It is the lump sum that is used to repay the mortgage debt. The advantage of this type of repayment method is that the pension contributions attract tax relief at the saver's highest rate of tax.
