ASKFinancially

Guide to Mortgages
UK Pensions

no obligation quote:Pension Release form

submit your details below for FREE mortgage advice:
name:
tel no:
email:
postcode:
mortgage amount:
property value:
by sumbitting this form you are agreeing to receive a call regarding your current mortgage circumstances.

Different types of Mortgages

The way you repay your mortgage can be divided into 2 categories:

Repayment:
Every month you will make a payment to the lender, this payment will go partly to reduce the loan and partly to pay the interest on the loan.

Investment / Interest Only:
This mortgage requires you to take out some form of investment usually a pension, endowment or ISA (Individual Savings Account).

Each month you make a repayment to the lender which covers the interest on the loan. You also make a payment to your investment vehicle; Pension, Endowment or ISA. At the end of the term, you will still owe the full amount that you borrowed but your investment will hopefully pay this lump sum and a little more.

Type Key features: Comments
Repayment Mortgage Guarantees to repay full loan by the end of agreed term. Monthly repayments tend to be slightly higher than Interest Only Mortgage Repayments.
Interest Only Mortgage There are no guarantees that the investments will grow enough to pay off the mortgage. If your investment hasn’t performed as expected you may have a shortfall. Alternatively, you may have an excess. Monthly repayments tend to be slightly lower than those of a Repayment Mortgage. Regular monitoring of your investments performance is essential.

These are your choices on how you would like to repay your mortgage. How much you pay each month is dependent on the mortgage type you choose.

ISA Mortgages
ISA stands for Individual Savings Account. This type of account is a tax-efficient way of saving money. There are three different types of ISAs on the market, 'cash', 'life insurance' and 'stocks and shares'; an ISA mortgage uses the latter variety.

You can use an individual savings account as a vehicle to pay off your mortgage by making regular or lump sum payments into the account, which are then used to invest in stocks and shares. If your investment is performing particularly well, you may even find that you are able to pay off your mortgage early, for which there are no penalties. As with any kind of investment however share growth is not guaranteed.

Dealing with ISAs can be a complicated business as there are a whole host of rules and regulations related to the scheme. Unless you fully understand the complex workings of the scheme, seek advice from a financial adviser to ensure you are getting the most out of this type of interest-only mortgage.

Pension Mortgages
This is where you pay into a stakeholder pension whilst also repaying the interest on your mortgage. One quarter of the pension fund can be taken as a tax-free lump sum when you retire which, if large enough, can be used to repay your mortgage. You then receive a regular income from the remainder of the fund. A pension plan can also provide tax-relief on life assurance cover.

As with any form of investment, pensions are not guaranteed to make you money and you therefore run the risk of owing more on your home than the fund is worth. If this happens, you will also have to deal with the added problem of having no income when you retire, so be absolutely certain that you are willing to risk both your mortgage and your retirement fund in one single investment. Make sure you regularly check how your fund is performing, and seek professional financial advice if you are concerned that your pension is not going to cover your mortgage debt.

Endowment Mortgages
Endowment mortgages used to be the most popular type of interest-only mortgage in the UK - but their poor performance in recent years has seen the popularity of these plans and policies decline, amongst both consumers and advice consultants alike.

Essentially it is a life assurance policy, which means that the mortgage will be settled by the plan provider should you die, but it is also a long-term savings scheme with funds being invested on the stock market. Click here for info on FSA regulations in the UK.

Fixed payments, which are calculated based on the term and amount of the loan, are paid into the policy along with a monthly fee to cover the interest charges on the mortgage. When the mortgage term is complete and the endowment policy matures, the investment is intended to pay off the mortgage balance.

The performance of this kind of investment depends heavily on external market conditions, and growth cannot be guaranteed. Therefore you cannot be certain that enough money will be generated to pay off the mortgage in full. Cashing-in an endowment policy early could result in you losing money, mainly because payments in the first few years are used to cover administration costs and expensive broker fees. It is therefore highly recommended that you seek financial advice if you are considering doing this.

The Different Mortgage Types Explained
There are hundreds of different types of mortgage types/products available, here we have outlined the most common types.

Mortgage Product How it works Comments
Fixed Rate As the interest is fixed this means that your mortgage repayment is the same amount each month. Usually for a term of 2-5years. Easier to budget. If interests rates fall you risk paying a higher rate and vice versa.
Standard Variable Payments vary depending on the Lenders variable Rate, which is based on the Bank of Englands base rate. Difficult to budget each month as repayments may change. Lenders may not rush to pass on the reduction in interest rates.
Tracker Tracks the Bank of Englands Base Rate. Some Trackers match the Base Rate and others may be 1% higher or lower for example. Difficult to budget each month as repayments may change. As it is linked to the Bank of Englands Base Rate, your rate is affected accordingly.
Capped This is where a maximum limit is placed on the rate you pay. Sometimes there may also be a collar, this sets the lowest rate you will pay. Knowing your maximum payment makes it is easier to budget. If the Lenders Variable Rate goes below the ‘capped’ rate you get the benefits of reduced payments.
Discounted This is a discount off the Lenders Standard Variable Rate. Variable repayments may make budgeting difficult. You may see rate increases passed onto you quicker than the rate decreases.
Stepped rate One particular deal for a period of time, then another deal for a further period, and so on until the borrower will end up on the standard variable rate. This deal may be attractive to people who are setting up home for the first time and have lots of initial outgoings.
Current Account (CAM) Combines your mortgage, current account, savings account and even your personal loans and credit cards into one account. Effectively it is like having a massive overdraft. Allows you to make overpayments and underpayments and borrow back money, so is fully flexible. You may get a debit card and a chequebook to help you withdraw money, up to a set limit. As the interest is charged daily, you can pay off your loan early. Your salary is paid into this account and should you not spend all your income at the end of the month, that amount is taken off what you owe on your mortgage.
Offset A similar product to the CAM, your accounts remain separate but work together. Your mortgage is reduced by the funds in your savings accounts and your current accounts. All your other debts, such as your credit cards or your personal loans are also linked into the nest of products, and this allows you to repay all of your debts at the mortgage rate, which is likely to be a lot lower than the standard rate on those borrowings If you do choose to combine all your debts you MUST be aware, you are turning short-term debts into long-term debts and this could cost you more in the long run.

All of these products may be subject to charges, such as administration or booking fees, charges for making over payments, underpayments or for an early termination (you may want to sell your house or want to change deals). The Key Facts document will show these fees, so it is important that you read and fully understand it. See your financial advisor for further information.

Download the Mortgage PDF Guide here - see our other free PDF guides here

Guide Contents

To Buy or to Rent
What is the process of getting a mortgage in England?
Getting mortgages in Scotland
The cost of buying a house
Mortgage
Different types of mortgages
Self Certified mortgage
Apply for a mortgage
Mortgage FAQ
Where to get more mortgage help

main menu   << previous page   next page >>