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Sell your old endowment policy.
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Endowment Mortgages
An endowment mortgage is effectively an interest
only mortgage with an additional savings plan in
the form of an endowment policy. Monthly
contributions are made to a Life Insurance
Company who invest your money in the savings
plan. Life insurance is built in to the savings
plan so your mortgage is repayed if you die
before the endowment policy reaches
maturity.
Endowment policies typically take two forms;
'with-profits' and 'unit-linked'.
A 'with profits endowment' has two bonuses; a
reversionary bonus and a terminal bonus. The
reversionary bonus is paid each year and is
guaranteed if the policy is maintained until its
maturity date. The terminal bonus is paid on
maturity of the policy and is dependant on the
performance of the underlying fund.
The value of a unit-linked policy is determined
by the value of the underlying investment at the
maturity date. The value of units on a
unit-linked policy can go down as well as
up.
Advantages
- If the investment growth rate exceeds those
estimated at outset you may be able to pay off
your mortgage early or enjoy a lump sum at the
end of the repayment period, in addition to
paying off your mortgage.
- The life insurance cover can be cheaper
than if purchased on its own.
- The mortgage can be transferred to another
property.
Disadvantages
- Endowment plan charges are relatively
high.
- You have no guarantee that you will have
sufficient funds to pay off the mortgage at the
end of the repayment period, as the investment
could perform below that assumed at the start.
(By monitoring your investment's performance
you could make additional contributions during
the repayment period if you felt the fund was
under performing.)
- Endowment plans are less flexible than
other types of investments, with most plans not
allowing you to stop and start premiums. Some
plans charge penalties if you stop paying
premiums.
Isa
An ISA mortgage is effectively an interest only
mortgage with an additional investment plan in the
form of an individual savings account (ISA). An ISA
is a stockmarket based investment that benefits
from tax free growth.
Strictly speaking, an ISA is not an investment but
a 'wrapper' within which an investment can benefit
from tax free growth. Choosing an individual
savings account is a subject in itself.
(Individual savings plans replaced personal equity
plans (PEP's) in the 1999/2000 tax-year, although
PEP funds can remain invested.)
Advantages
- If the ISA performs well you may be able to
pay off your mortgage early or enjoy a lump sum
at the end of the repayment period, in addition
to paying off your mortgage.
- ISAs are potentially tax efficient,
particulary for higher rate taxpayers.
- An ISA can be selected to suit your
circumstances and risk profile.
Disadvantages
- Your debt remains constant throughout the
mortgage period.
- You have no guarantee that you will have
sufficient funds to pay off the mortgage at the
end of the repayment period, as the ISA could
perform below expectations. (By monitoring your
ISA's performance, you could make additional
contributions during the repayment period if you
felt the underlying fund was under
performing.)
Interest Only
Mortgages
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