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Interest Only Or Repayment Mortgage. Which To Choose? |
By:
Chris Clare |
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Interest Only Or Repayment Mortgage. Which To Choose?
Chris Clare
Although we all know that there is no such thing as a free lunch, and borrowed money has to be repaid sometime, the interest only option is making the actual act of repaying seem more and more forgotten about. Therefore this article seeks to highlight the ways in which mortgages can be arranged so that eventual repayment is a priority.
Firstly, you need to understand how mortgages are set up. Regardless of the many types of interest deals around, mortgages come in two basic forms. Capital repayment and interest only.
Capital repayment is simple, with every mortgage you are charged interest this is the same whether you have repayment or interest only. The difference is with repayment you pay the interest which is due and you also pay a small portion of the capital. So every month the overall size of the debt reduces however small it may be. But this constant chipping away at the debt means that after the 25 years, assuming it is a 25 year term, the debt is fully repaid.
Interest only mortgages are as they sound. You are just paying off the interest accrued and the initial debt doesn't change, meaning that you must make arrangements to pay this off some other way. This may sound very risky at first as the debt is not being steadily cleared, but there are a few ways around this. One method is to arrange what is called a repayment vehicle.
One method which used to be very common but is now less in favour is an endowment policy. An endowment is effectively a life insurance policy which runs the duration of the mortgage but which also accrues cash through contributions and returns on investments. The principle behind this is that by building up this cash pot, by the end of the term of the mortgage you have amassed enough capital to pay off your debt in full.
However, with an interest only mortgage you really only need to gather enough money to pay off the initial loan so there are other ways to go than just endowment. A pension policy can also generate enough cash to give out a lump sum as well as a pension, and so could be employed as your repayment vehicle. All you need to assure is that the money you are paying into a pension policy is enough to guarantee that at the end of the term you have sufficient tax free money to pay off your debt on your home whilst also leaving enough extra to give a pension. Pension link mortgages can be a very attractive option, in particular when you consider the tax benefits attached to them.
Savings plans, personal equity plans and even personal savings accounts can all be used as repayment vehicles now. But in honesty any type of savings plan, including unit trusts and bonds, can be used as long as they create a sufficient lump sum. However, with that, it must be remembered that with any sort of investment plan you are always at risk if it doesn't produce the returns you were hoping for.
So you can see, there are basically repayment and investment only mortgages. With investment only, you must also allow for the repayment vehicle. Whatever option you choose, but especially if opting for investment only, you should seek advice from a professional. It will prove invaluable. Particularly in the case of investment where a misdirected decision can be very costly indeed.
Mortgage Route gives information help and mortgage advice from qualified http://www.mortgageroute.co.uk) mortgage brokers along with no obligation http://www.mortgageroute.co.uk) mortgage calculators and sourcing tools.
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Article Source: http://www.statssheet.com/articles/article67794.html |
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