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Mortgages How To Repay Your Mortgage
1. More Mortgage Info
Mortgages - How to repay your mortgage
There are two ways to repay the amount you have borrowed (the ‘capital’). Their
advantages and disadvantages are described below.
Repayment mortgage (also called a capital-and interest loan)
Your monthly payments gradually pay off the amount you owe as well as paying the
interest charged on the loan. Provided you make all the agreed payments, the loan will be
fully paid off by the end of the mortgage term.
Interest-only mortgage
Your monthly payments cover only the interest on the loan. They do not pay off any of
the capital. You will need to arrange to pay separately into a savings or investment
scheme to build up a lump sum to pay off the mortgage at the end of the term. See Step 8
How to repay your mortgage - Interest-only. It is your responsibility to make sure you
have enough money to repay the mortgage at the end of the term, otherwise you could
lose your home.
Page1 of 7 Date 1/10/2007
2. More Mortgage Info
Source of information – FSA – Consumer information
Mortgages - How to repay your mortgage
Advantages and disadvantages of the repayment methods
Repayment Interest-only mortgage
Mortgage
Will it pay off the Yes, as long as you No, not on its own. You need to have some
mortgage? make all the other arrangement for repaying the loan.
payments agreed You will need to make monthly payments
with the lender, the to a savings or investment plan to build up
whole loan will be a lump sum.
repaid by the end
of the mortgage But there is a risk that the plan will not
term. grow enough to pay off the mortgage in
full.
What if interest It doesn't matter which method you have, if interest rates rise,
rates go up? your payments will normally increase (unless you have a fixed
interest rate
Moving home and You will usually Because you won't have repaid any ‘capital’
re mortgaging have paid off some you will need to pay off the same amount
of the ‘capital’ and that you borrowed.
Whether you move so will need to pay
home and stay back less than you But you can carry over any accompanying
with the same borrowed. savings plan to your new mortgage and the
lender or take a mortgage term for this part of the loan will
mortgage with a When arranging be what's left of the term of the plan (that
new lender, you your new is, you don't need to start again).
will need to repay mortgage, even if
the mortgage and you are borrowing If the new mortgage is bigger than the old
start a new one. more, see if you one, you need to decide how you will pay
can afford the new off the extra loan (this could be done on a
monthly payments repayment or interest-only basis).
over the term that
you had left on the
last mortgage –
you don't have to
take a repayment
mortgage over 25
years.
What if you run You could ask Your lender might agree to reduce or even
into problems your lender to stop the mortgage payments for a while.
keeping up your extend the term or
monthly accept interest- But you will not necessarily be able to
Page2 of 7 Date 1/10/2007
3. More Mortgage Info
repayments? only payments for reduce the amount you pay each month into
a while. This a savings scheme (particularly if it is an
reduces the amount endowment policy).
you pay each
month in the short
term but increases
the total cost of the
loan. Your lender
might agree to stop
your payments for
a while.
Is this a suitable Yes, if you want to Whether an interest-only mortgage suits
mortgage for be absolutely sure you depends on whether you’re
you? that your loan will comfortable with taking the risk of repaying
be fully repaid at your mortgage with a savings plan which is
the end of the linked to the stock market.
term. Don’t forget
your monthly If you are not comfortable with this risk, a
payments could repayment mortgage is likely to be a better
increase if interest choice.
rates rise.
Mortgages - How to repay your mortgage
- interest only - some stock market
schemes to pay off a mortgage
Method Advantages Disadvantages
Endowment Life insurance - is built Commission and charges – these
mortgage - a type of into it. Some policies are taken out of the fund which
investment which aims include cover for critical means less of your money is
to build up the lump illness, accidents or invested to grow.
sum you need by unemployment.
investing in shares or Inflexible – there may be financial
unit-linked schemes. Risk – varies with the type penalties if you stop paying into
You must save into the of investment you choose. the plan before the end of its full
investment plan every With-profits funds are term or cash it in after only a few
month until the aimed at people seeking years.
mortgage term ends. medium-risk investments;
unit-linked funds often Keeping track – Your policy
enable you to switch provider will send you reviews
between funds, so you can every 2 years. You may need to
choose the risk profile that increase your payments if the
suits you. investment is not performing well.
Individual savings Tax – currently the return Limit – you cannot pay more than
account (ISA) on investments held in an £7,000 into an ISA in each tax
ISA is free of personal
Page3 of 7 Date 1/10/2007
4. More Mortgage Info
mortgage –
You put your savings
taxes.
Choice – You can use
year.
Commission and charges - set-up
into shares or unit cash, stocks and shares to costs and a percentage of the fund
trusts. The ISA wrapper build up your ISA savings. must be paid each year.
means that growth from
investing your savings Flexibility – You can vary Life insurance - not included.
is tax-free. the amount you save, stop
paying in or withdraw your Risk –could be a problem if you
money at any time. You need access to your investment
can also switch when share prices are low.
investments easily.
Keeping track – could be a
problem as there's no automatic
review process. You may not
realise when you need to increase
your payments. You may need to
increase your payments if the
investment is not performing well.
Pension mortgage Tax – you get income tax Charges and premiums – can be
relief at your highest rate high if you need to ensure your
your savings are paid on contributions you make investment will pay off the
into a personal pension into the pension plan. The mortgage.
plan from which you lump sum you get when
eventually take a tax- you retire is tax free. Inflexible – you can't take any of
free lump sum and use the money till at least age 50 and
it to repay the loan. Life insurance – is built this could rise to 55 by 2010.
into the pension?
Life insurance - not included. But
if you die before pension age, the
money in your fund could be used
to pay off the mortgage - but it
may not be enough.
Risk –There will be less money
for your retirement because you're
using the lump sum to pay off the
mortgage.
Keeping track - could be a
problem as there's no automatic
review process. You may need to
increase your payments if the
investment is not performing well.
Page4 of 7 Date 1/10/2007
5. More Mortgage Info
Mortgage repayment v- Interest only
In sourcing your mortgage, I can confirm that Mortgage-Desk have outlined the different
methods for the repayment of your mortgage and I have received a copy of the
“Mortgages - How to repay your mortgage” booklet.
I can confirm that I have made the following provisions for the repayment of the
mortgage at the end of the term of the mortgage:
Please Means of Details
tick Repayment
Capital & Interest No repayment vehicle required
mortgage
Endowment Plan
Pension
ISA
Inheritance
Sales of mortgage
Property
Sale of other
Property owned
Other Investment
Plan *
Sale of other
Assets/ Business *
* This can include:
Cash Savings, Stocks & Shares, Unit Trust, Investment Bond, Sales of Business, Sales of
Commercial property (BTL) and Sale of non property assets.
Name: ______________________ Name: ______________________
Signature _____________________ Signature _____________________
Date _ _ / _ _ / _ _ Date _ _ / _ _ / _ _
Page5 of 7 Date 1/10/2007