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Interest Only Mortgages
Money is lent on the basis of payback to the lender
with interest. However the capital lent sum,
without further provision, does not reduce.
An interest only mortgage requires you to make
monthly payments to the mortgage lender to cover
the interest on the amount borrowed. It is
neccesary to establish a separate long term
investment plan that will accumulate enough funds
to pay off the full loan amount in your planned
period of time.
With an interest only mortgage there is no
repayment term since the mortgage is only payed off
on adequate maturity of investment plan provisions.
As such the interest-only mortgage continues at
whatever rate agreement has been chosen until other
funds are available to pay back the borrowed
capital sum.
The investment plan required to pay off the
mortgage usually comes in one of three forms; an
ISA (individual savings plan), a pension or an
endowment. This investment does not have to be
provided by the mortgage lender.
Advantages
- You can choose an 'investment vehicle' that
is tax efficient.
- 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.
Disadvantages
- 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.)
- Some forms of investment may incur a penalty
fee if you stop paying premiums.
- Your debt remains constant throughout the
mortgage period.
Pension Mortgages
A pension mortgage is an interest only mortgage with
an additional investment plan in the form of a personal
pension. A personal pension is a stockmarket based
investment that benefits from tax relief and tax free
growth.
A pension pays a tax free lump sum and a monthly taxed
income on retirement. The lump sum is normally used to
pay off the mortgage.
Advantages
- Pension contributions benefit from up to 40% tax
relief for higher rate tax payers.
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 pension fund could perform
below expectations. (By monitoring your pension fund's
performance, you could make additional contributions
during the repayment period if you felt it was under
performing.)
- The lump sum cannot be used for other purposes. You
therefore need to ensure that your level of pension
contributions are sufficient enough to maintain your
required standard of living during retirement.
- The mortgage period may be longer than 25 years,
depending on your age. You will still need to meet
interest rate payments throughout this period.
- The tax situation regarding pensions is open to
unforseable changes.
How Much Can I Borrow
?
Mortgage Payback
Rates
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