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About Mortgages |
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More information on Interest only
mortgages:
If you elect to have a interest only mortgage then your
payment to the lender only represents the interest due on
the outstanding debt. In order to repay that debt then
normally you would use an additional savings vehicle. One
that enables you to build a fund of money from which you
can clear the mortgage at the end of the agreed term. The
lender may also expect you to have sufficient life
assurance cover to enable your next of kin to repay the
debt if you die during the term of the mortgage.
The three most common savings vehicles used for mortgage
repayment are:-
- ISA:
you can benefit from the tax concessions available
within these plans. Under current legislation any income
or gains achieved from your ISA plan are tax-free. It is
from the proceeds of your plan that pay off your
mortgage. An added opportunity, if your ISA performs
exceptionally well, or you can afford additional
payments to it, is that you may be able to repay your
mortgage ahead of schedule.
- Pension:
by using the tax-free lump sum facility available from
your pension plan to pay off your mortgage debt, you can
take advantage of the tax relief that are available on
pension contributions. You must remember that under
normal circumstances the benefits under pension plans
may not be drawn before age 50. Therefore the earliest
likely date at which you could repay your mortgage debt
would be 50.
If pension benefits are provided by your employer, these
cannot normally be taken until you actually retire from
that employment. According if you are looking to pay off
your mortgage earlier than when you retire then a
Pension may not be the appropriate repayment vehicle for
your needs.
Since part of your pension fund is being used to clear
the mortgage debt, you should be aware that your income
in retirement will reflect this fact as less money will
be available for the provision of income. Careful
consideration needs to be given to this repayment
method. You would be wise to seek advice from your
financial adviser before adopting this approach.
- Endowment:
These are Life Assurance policies that serve two
purposes. Firstly they provide financial protection in
case you die before the end of the mortgage term.
Secondly, if you survive throughout the policy term, the
investment element of the policy provides a lump sum
(maturity value) that can be used to repay the
outstanding mortgage debt.
The use of these arrangements has been very popular in
the past but has received negative press coverage during
in the 1990s. There is some suggestion that many of the
problems were associated with poor advice when
homebuyers first took out the endowment policies along
side their mortgage loans. It must be understood that
endowment policies are long-term investments, the value
of which may rise and fall in line with the stock
market. However over 25 years, they may yield more than
the amount you need to pay off your mortgage although
there are no guarantees available.
There are three types of endowment policies:
- With profits: you share in the profit of the
life company through which you buy the policy. This
profit is added to the amount in your funds
- Unit-linked: the value of your units rise and
fall in line with the underlying funds into which your
money is being invested
- Unitised with profits: a new version of the traditional
with profits concept that provides the ability to value
the policy quick and allows the charges to be specified
and collected in a similar manner to a unit linked plan.
Please note that none of the above methods are guaranteed
to repay your mortgage at the end of the mortgage term
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