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6 | Guide for Buyers and Sellers
Choosing your
Endowment mortgages guaranteed and you may be left with a shortfall
If you choose this type of mortgage you pay left to pay.
mortgage
only the interest to your lender. In addition
you pay a monthly premium into an endow- ISA mortgages
A mortgage is made up of two ingredients: the ment policy run by a life insurance company. As with endowment and pension mortgages,
capital which is the amount of money you The endowment policy hopefully pays a an ISA mortgage involves two sets of regular
borrow from your lender to buy your home, lump sum either at the end of the mortgage payments: interest payments to the lender and
and the interest the lender charges on the term, or if you die during the mortgage term. payments into an ISA. ISAs give you the potential
capital until you pay it back. Your lender has The lump sum repays some, if not all, of your of earning money on your investment without
many different types of mortgage available, mortgage and, if the endowment policy has paying income tax or capital gains tax when you
using various methods of repaying the capital performed well, you may get a tax-free surplus take your money. ISAs are limited in terms of the
and the interest. at the end of the mortgage term to spend as amount you can invest and they are not guaran-
you wish. Remember, though, this can not be teed to grow enough to pay off your mortgage.
Repayment mortgages
Also known as a capital and interest mortgage,
this type of mortgage is probably the most
straightforward. Each month you make a
payment, comprising a portion of both the
capital and the interest on your loan. At the
end of the mortgage term, both the debt and
the interest have been paid off.
A repayment mortgage is very flexible, which
is important in an ever-changing environment.
For instance you can alter the length of the
mortgage term or the size of your monthly
payments very easily as long as your lender
agrees. So, if mortgage interest rates fall, you
can keep your payments the same but shorten
the length of your mortgage term. And if inter-
est rates go up, it is in some cases possible to
pay the same amount each month, but com-
pensate for the added cost by extending the
length of your mortgage.
Repayment mortgages are straightforward,
flexible, and can be the right type of mortgage
for just about everyone, especially for first-time
buyers. And last, but not least, it is guaranteed
that you do pay off your mortgage at the end of
its term, provided you keep up your repay-
ments.
Interest only mortgages
This is the second main type of mortgage
available. As the name suggests, this is a
mortgage where you pay only the interest
to the lender and you can choose how you
repay the capital as a lump sum at the end of
the mortgage. Your monthly payments are
lower because you are only paying off the
interest but you should ensure you are able to
pay off the capital. Also, because you are not
reducing the amount you owe, it works out
being more expensive overall than a repayment
loan.
This is really the basis of the old endowment
or an Individual Savings Account (ISA) mort-
gage as you should take out a savings or invest-
ment plan which will help you pay off the
capital at the end of the mortgage.
Endowments and ISAs have been the favourite
means of achieving this. Some lenders don't
even ask you how you are going to repay the
capital, but obviously a responsible lender
should make sure that you can repay the loan.
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