Mortgage repayment

Repaying your mortgage

While there are several interest charging options, there are just two means of repayment; interest only and capital and interest(repayment)

With an interest only mortgage you pay the interest only to the lender and take out a further investment alongside which you hope will pay off the loan at the end of the term.

Mortgage lenders are fairly flexible about what investment method is used to pay off the loan and popular choices have been endowment policies, unit trusts and pensions. 

With a capital and interest mortgage each payment pays both the interest and a small part of the capital. With this type of mortgage your mortgage loan will be paid off by the end of the term. 

With a capital and interest (repayment) mortgage you are definitely going to clear your mortgage 

With a interest only mortgage you hope that your invested capital will exceed your mortgage

For most people a capital and interest mortgage will be the best choice to make

Some lenders will allow a retirement age up to 75. In these circumstances, lenders look for evidence that it is reasonable to work to this age. If the applicant is employed is it acceptable by the employer for an employee to work beyond 67.

For a self employed person, is it reasonable for the applicant to continue self employment beyond age 67. Lenders will sometimes look at whether the occupation is manual or desk based.

Mortgage lenders are likely to specify a maximum term

If you extend the term you will reduce the repayments on a capital and interest mortgage.

For example, the monthly repayments on a capital and interest mortgage of £100,000 over 25 years with a mortgage interest rate of 5% might be £591 pcm. If we extend the term to 35 years, the monthly payment reduces to £509pcm

Bear in mind that the longer the term, the more interest you will be paying back to the mortgage lender. For this reason it is a good idea to choose a minimum term that is consistent with being affordable and also maintaining your quality of life

With an interest only mortgage altering the term makes no difference to the monthly mortgage payments

Interest only Mortgage

An interest only mortgage, as the name implies, means you are just paying the interest back to the lender

You will need to consider how will you repay this mortgage

Some borrowers intend to repay their mortgage from the proceeds of an investment. 

Investments 

The following information is provided for information only. We recommend you take investment advice from an Independent Financial Adviser regarding what is the most suitable investment for your situation

The following investments have been popular choices for people with interest only mortgages. 

Endowment policies : These policies are run mainly by insurance companies and friendly societies. They are regarded as low to medium risk investments. The fund managers invest on the stock market, in property and in fixed interest investments. Policies can be unit linked or with profits. Unit linked means that a value is calculated, usually daily which directly relates to the value of the underlying fund. Unit prices can be followed in the broadsheet newspapers. 

A 'with profits' policy entitles you to a share in the profits of the insurance company. Issuing companies vary their annual bonus according to investment performance and anticipated future investment conditions. The variance in annual bonus has historically been small which provides a degree of security to the policyholder. A terminal bonus is also normally declared at the end of the term. Life assurance is included in the contract which will pay off the mortgage in the event of death. 

Unit trusts : Predominantly stock market investments where your money is 'pooled' together with other investors in a fund which may be managed or unmanaged (tracker). There is a risk element to your capital as unit prices can fall as well as rise, and aperiodic review would be recommended to ensure that the fund performance is adequate. This type of fund is quite flexible and tax free benefits are available if taken out within an ISA. 

ISA : ISA's are tax free investments which can be used with an interest only mortgage. 

Pensions : If you are eligible for a personal pension, you can opt to use part of your pension fund to clear your mortgage. 

This will obviously reduce the amount that you will have available to go towards your pension, however you will receive full income tax relief on your contributions

If you are considering an interest only mortgage backed by an investment then Investment advice should be sought from an Independent Financial Advisor