Whilst most people appreciate that when borrowing money there’s a need to repay it, in today and age with interest only mortgage abound the ultimate goal of actually repaying the mortgage can be sometimes lost. In this article we discuss the ways mortgages can be set up and the overall need to ensure that some way repayment needs to be a priority.
Firstly, you need to comprehend how mortgages are set up. Regardless of the many types of interest deals around, mortgages come in two basic forms. Capital repayment and interest only.
No matter which one you select there will be some form of interest to be paid. With a capital repayment mortgage you pay interest on the mortgage plus a small amount of the capital borrowed so that the loan is gradually reduced every month. If you choose this form of mortgage over, say, a 20 or 25 year period, at the end of the period the loan will be paid off.
Interest only mortgages are as they sound. You are just paying off the interest accrued and the initial debt doesn’t change, meaning that you must make arrangements to pay this off some other way. This may sound very risky at first as the debt isn’t being steadily cleared, but there are a few ways around this. One method is to arrange what is called a repayment vehicle.
One method which used to be very common but is now less in favour is an endowment policy. An endowment is effectively a life insurance policy which runs the duration of the mortgage but which also accrues cash through contributions and returns on investments. The principle behind this is that by building up this cash pot, by the end of the term of the mortgage you’ve amassed enough capital to pay off your debt in full.
It has to be said however that all an interest only mortgage needs is a suitable amount of money in order to repay it. So Endowment policies are far from the only repayment vehicle that can be used effectively. Owning to the fact that most pension policies can quite effectively produce lump sums as well as a pension they have the ability to also be used as repayment automobiles in their own right. All you do is pay into a pension a sufficient amount of money to ensure that the tax free cash is enough again to meet the size of the debt at the end but you also get a pension in the bargain. A lot of people see pension link mortgages as very effective repayment cars especially when you factor in the excellent tax advantages associated with them.
Some people also use other types of investments as repayment automobiles such as savings plans, old personal equity plans and more recently individual savings accounts. But really any investment such as a unit trust or bond can be used as long as it builds up a lump sum. That stated with any investment type of repayment vehicle there is always going to be an associated risk as you are always relying on the returns within the plan in order to build up the fund to meet the mortgage debt.
To sum up, there are repayment and investment mortgages, but with investment only you must also factor in the repayment automobile. Anyone looking to take on a mortgage should get professional advice in order to find the right option for you as an individual, but that advice is especially crucial when considering the interest only option as mis-investment can prove to be very expensive in the long run.