Repayment Methods
Capital & Interest Repayment
Also known simply as "Repayment", this type of mortgage is by far the most popular method with borrowers today. The payments you make to the lender comprise of part interest and part capital so that you are paying off the debt over your chosen loan period.
In the early years most of your payments are made up of interest so that the mortgage debt will not reduce significantly in the initial stages. Towards the end of the term however, most of your monthly payments are capital so you will see the size of your loan reduce quite dramatically.
- It is safe. If you make all of your payments in full and on time, your mortgage will be paid off at the end of the term.
- More expensive than Interest Only.
Interest Only
With this option you are simply paying the interest that accrues on the debt and nothing more. The loan itself is not being repaid and at the end of the mortgage term, you still owe the original amount borrowed.
- Cheapest form of mortgage payment.
- Good for those who need to keep payments very low.
- The debt never gets repaid.
- Should you not have funds elsewhere with which to pay the lender at the end of the mortgage period, you would have to sell the property in order to repay the lender the money that you owe.
Investment Linked Mortgage
Under this method you still have an interest only mortgage with the lender but additionally you save money in an investment fund (usually run by a Life Assurance company or Investment house) which will hopefully accrue sufficient funds over the life of the mortgage to repay the debt at the end. Typical examples of the type of investments used are Endowments, Pensions and ISAs.
Whilst very popular in the 80's and early to mid 90's, Investment mortgages are less popular nowadays due to the concerns that many have about the long term predictability of the Stocks and Shares that many of these products invest heavily in.
- Potential for Higher Returns – If the investment performs well, you could pay off the mortgage early or have extra funds left over.
- Flexibility - Some investment-linked mortgages allow flexibility in payments and investment options.
- Tax Efficiency - Depending on the investment vehicle (e.g., ISAs in the UK), returns can be tax-free.
- Lower Initial Monthly Payments - Payments can sometimes be lower compared to a traditional repayment mortgage, as you are not directly paying off the loan but investing instead.
- Risk of Shortfall - If the investment underperforms, you may not have enough to repay the mortgage, requiring additional funds at the end of the term.
- Market Volatility - The value of your investment depends on market conditions, making it unpredictable.
- Ongoing Costs - Some investment products have management fees, which can eat into returns.
- No Guaranteed Mortgage Payoff - Unlike a repayment mortgage, where the debt decreases over time, an ILM relies on investment growth, which isn't guaranteed.
- Regulatory and Policy Changes - Changes in tax laws or financial regulations can impact investment performance or returns.
Premier Financial Services will cover each step thoroughly with you so that you fully understand the options and are able to select the package most suitable to your needs. Contact our knowledgeable staff today for more information.
There are many factors involved with deciding your repayment method. Some can be summarised as:
- Your attitude towards risk
- Your present financial situation
- Your expected future financial situation
- Whether you have existing investments already in place