Only interest is paid to the lender, another repayment method must be
put in place if the loan is to be repaid at the end of the mortgage. This
loan is usually one of the following:
Endowment
An endowment is a savings plan that is used to repay a mortgage at the
end of the term, each month the money paid into the plan pays for life
cover and a savings element, these plans were very popular throughout
the eighties and nineties. If the company who look after your money
are successful with their investments there may be some extra money
back at maturity even after the mortgage has been repaid. In some cases
the reverse is true some endowments were set up in times of high investment
returns and higher interest rates, they may not have enough to cover
the original loan borrowed.
Nonetheless millions of borrowers have one or more endowment policies
and as a rule these should not be cashed-in early and certainly not
before seeking advice from a suitably qualified financial adviser.
Endowments provide life assurance so that in the event of death the
mortgage is paid off, some also include critical illness insurance
too.
ISA Plan
ISAs replaced personal equity plans from April 1999. An ISA is a savings
plan where contributions are made. The contributions can be varied
and ISA's do not have a fixed term. They are very flexible and could
be used to support an interest only loan. The borrower though must
have the self-discipline to keep contributing to them for the term
of the mortgage.
Pension Plan
Another product that can be used to repay a mortgage is a personal
pension plan, a 25% tax free sum can be taken between ages 50 and
75 and used to repay the mortgage. The pension can not be assigned
to the lender, the lender therefore may want a written assurance from
the borrower that the tax free cash will be used to repay the loan.
One disadvantage is that money going towards the repaying of the loan
cannot be used to buy pension an annuity, and also the money can only
be taken at age 50 to 75 and the cash sum must be taken at the same
time as buying the annuity.
Advantages
of interest only mortgages
If the proceeds of the plans exceed the amount required to repay
the mortgage, then this is received as a cash lump sum by the borrower.
Some plans are tax-efficient.
Disadvantages
of interest only mortgages
If the proceeds of the repayment vehicle do not achieve the amount
expected, then there will be a shortfall. The borrower remains liable
for any shortfall on the mortgage hence the outstanding balance will
need to be paid off from other resources. Regular checking of the
policy fund itself by the borrower and the lender should minimise
any risk. If the plan is not reaching its expected target, the borrower
can increase payments into the policy or invest in another product
to cover any anticipated shortfall.
Cashing in the plans early may result in financial penalties. These
will be provided for in the initial agreement. In addition the lender
has no way of checking to see if any of the above mentioned plans
are on target to repay the loan.
This content of this site is for
information purposes only, as a plain speaking introduction to mortgages.
No claim to the accuracy of information on this site is made and you
are strongly advised to verify information presented
here with a qualified advisor before making any financial decisions
based on this information.
Advantages
of interest only mortgages
Disadvantages
of interest only mortgages