Mortgages

Repayment Mortgage
Interest only
Endowment
PEP, ISA and Pensions Mortgages
Flexible Mortgage

A mortgage is a loan, which is secured on your property. The mortgage deed is the legal contract between the borrower and the lender. There are various types of mortgages, including repayment, interest only (endowment, ISA, PEP and pension) and a flexible mortgage. In all cases your regular payment includes interest, but how the capital is repaid depends on the type of mortgage selected.

Repayment Mortgage

A Repayment Mortgage is where you pay off part of the capital each month as part of your regular payment. The amount of capital you pay off per month generally increases towards the end of your mortgage term.

In general, the shorter the period of the loan, the higher the monthly payment will be.

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Interest Only Mortgage

An Interest Only Mortgage is where you repay the loan amount separately, for example, by an investment vehicle such as an ISA, endowment, PEP or pension. Provided the interest rate is constant, the monthly amount will remain constant, regardless of the length of the loan.

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Endowment Mortgage

Endowment Mortgages - An interest-only mortgage repaid using an endowment policy as the investment vehicle. An endowment policy combines life assurance and savings. This type of policy is intended, but not guaranteed, to repay the loan at maturity, but will also repay the loan if you should unfortunately die during the term of the policy. Because the endowment policy may leave a shortfall, many companies offer review facilities to ensure that the policy stays on track.

An endowment mortgage therefore consists of the loan on which you pay interest to the lender and the endowment policy on which you pay premiums to the product provider.

Most endowments have a range of options such as waiver of premium, which is intended to pay the premiums on your policy if you are unable to work for a period of time due to accident, sickness or disability.

Most endowment policies are invested in equity based funds. As such they are intended as a medium to long term investment which should be held to maturity . Because they are equity linked their value may go down as well as up. As a result, you may not get back the full amount invested, especially if you withdraw from the investment in the early years. The policy can be invested in either with-profits or unit-linked funds.

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ISA, PEP and Pensions Mortgages

These are interest only loans, which, instead of relying on an endowment policy to pay off the loan amount at the end of the mortgage term, use an alternative investment policy, for example an ISA, PEP or pension.

Most ISAs, PEPs and pensions are equity linked arrangements and so are intended as medium to long term investments (usually considered to be five years or more). Because they are equity-based, they are dependent on stock market movements. It also means your capital is not usually guaranteed to be safe and so you may lose some or all of it.

If the investment is a unit-linked one, its value can reduce in direct relation to the stock market prices of its underlying assets, although it can also rise. This means you may not get back all the money you invested. If it is a with-profit arrangement, there is not the same direct link between the underlying assets and the value of your policy. This is because the insurance company holds back some profit from good years to offset losses in poor ones – this is referred to as smoothing. The provider cannot withdraw any reversionary bonuses declared, although your early withdrawal may result in a Market Value Adjustment – effectively a financial ‘penalty’.

You can save through either an ISA or a personal pension. There are different types of ISA offering a wide range of investment options. In the past, you may have saved through PEPs (Personal Equity Plans). Since 6 April 1999, you have not been able to pay any new money into PEPs but you can continue any PEPs you had already started before that date.

Examples of pensions are executive pension plans and personal pension plans to name but two. Your personal circumstances may suggest utilising the lump sum available in your pension policy as a mortgage repayment vehicle. We can discuss this with you in detail if it is appropriate.

Separate life cover may be required by your lender if you take out an interest only mortgage with a repayment vehicle that doesn't include life cover as part of the policy, for example a PEP, ISA or personal pension.

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Flexible Mortgage

Many people have their financial arrangements split between various sources and as a result they will have a number of different interests rates and charges for their mortgage, personal loans, credit cards and current account.

With a flexible mortgage all this can be combined in a single account, charging a single interest rate on all of these personal borrowings. This can have the effect of reducing the amount of interest paid over the term of a mortgage.

Remember, this section contains general information only and is not an indication that any particular mortgage product is available or is suitable for you. Please contact us to answer specific queries or arrange an appointment to discuss your personal circumstances.

The Financial Services Authority does not regulate mortgages or advice on general insurance and some types of life assurance contracts, although it does regulate the financial soundness of insurance companies.

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