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Mortgages - Types of Mortgage
There are three main types of mortgage;
- Repayment Mortgage
- Endowment Mortgage
- Pension Mortgage
1. Repayment Mortgages
A repayment mortgage is paid back over a set number of years with interest. Each month you would repay part-capital and part-interest. As the mortgage reduces steadily over the years, the amount of interest payable also decreases. Therefore, over time, your monthly repayment will consist of an increasing amount of capital and a decreasing amount of interest.
First time buyers can take out a Low Start Capital Repayment Mortgages. This mortgage consists of interest-only repayment for an initial period, followed by a gradual increase in capital repayment. The initial lower repayments means higher payments later on.
Your home is at risk if you do not keep up repayments
2. Endowment Mortgages
An Endowment Mortgage is the simplest type of mortgage. It consists of a monthly payment made up of:
- Interest on the loan and
- A monthly contribution to an endowment (life assurance) policy.
The loan itself is paid off in one lump sum with the proceeds of the life assurance policy. During periods of low interest rates, there may even be a surplus left from the policy after paying off your mortgage.
When Should I Choose an Endowment Mortgage?
- When the Interest (Base) Rate is low (i.e. less then 12%). When you expect your earnings to increase in the future.
- Not during a recession - you will probably have to increase your monthly premium to meet your payback period.
3. Pension Mortgages
If you have a personal pension scheme, a Pension Mortgage may be an appropriate option. A pension mortgage is similar to an Endowment Mortgage except that contributions are made into a pension scheme rather than a life assurance policy. Each month, you pay the interest on the loan plus a contribution to your personal pension scheme. The lump sum generated by your pension scheme is then used to pay off the whole mortgage. The main advantages is all three payments are tax free.
You will also need to have a separate life assurance policy to cover you in case you die before retiring. (The Mortgage Guide - www.houseweb.co.uk/house/buy/mortgage/)