Mortgages and equity release
A guide to mortgages
What is a mortgage?
A mortgage is made up of two parts:
The Capital
This is the amount of money that is borrowed from the lender to purchase the property.
The Interest
This is the interest that the lender charges on the capital until it is repaid at the end of the mortgage term.
Types of Mortgage:
Repayment mortgage
Each month your payment to the lender repays some capital and some of the interest. As long as you maintain your payments you can be certain that your mortgage will be repaid at the end of the term.
Advantages
- As long as the monthly payments are maintained the mortgage will be repaid at the end of the term - no need to worry about investment returns
- Ideal if you wish to limit the risk linked to your mortgage
- Simple to understand with payments to one provider
Disadvantages
- No possibility of additional investment returns
- If you move house frequently it is difficult to build up equity in the property in the early years, as early payments are mainly interest
- Limited possibility of repaying the loan early without increasing monthly payments
Interest only mortgage
Each month the payment to the lender repays the interest on the loan. In this way the amount that is owed to the lender remains the same throughout the mortgage term. At the end of the mortgage term the lender will require the original amount of the loan to be repaid. A separate savings vehicle is used to build up enough money to repay the loan.
Mortgages & equity release section links:
the mortgage process | a guide to mortgages | a guide to equity release
Commonly used savings vehicles are:
- Endowments (With profits)
- PEPs (Pre April 1999)
- ISAs (Post April 1999)
- Pensions
Advantages
- Offers the potential for additional investment return at the end of the term or the ability to repay the loan early, subject to investment return
- The savings vehicle is usually portable when you move house
- Choice of a wide range of investments that can be tailored to meet individual needs
- Easy to move the mortgage without disrupting the repayment plan
Disadvantages
- The ability to repay the loan is dependent upon the investment performance of the savings vehicle
- You are responsible for the repayment of the loan at the end of the term
- Two separate payments to track. One to the lender and another to the investment company
Your home may be repossessed if you do not keep up repayments on your mortgage.
For advising on mortgages we can charge a fee of typically 0.35% of the loan amount, or we can receive commission from the lender.
