Repaying your mortgage, from Hillhouse Mortgages
Our guide to repayment methods for your mortgage. If you'd like any additional help with mortgage planning and arranging, contact Hillhouse today.
The repayment method
A repayment mortgage works in the same way as most loans. You pay a regular monthly payment that covers the capital borrowed as well as the interest. Provided you always keep up the correct payments, at the end of the term you will have repaid the loan in full.
Interest-only
With interest-only mortgage repayments, you repay only the interest. The capital you owe remains the same throughout the mortgage term. In most cases lenders grant this type on condition that a savings plan is in place to repay the capital. Saving plans most commonly used are endowment plans, a personal pension or ISA (see below for more details). Remember that if you use an investment to repay the capital at the end of the term, maturity values are not guaranteed.
Endowment
This type of mortgage requires you to pay a monthly premium to an insurance company for an endowment policy. The policy aims to pay off your mortgage at the end of the term. There is no guarantee that this will do so; this will depend on stock market conditions and performance. However, it may produce a surplus over the mortgage sum, and if so, this sum will be yours. Life cover is built in, so you don't need separate life insurance.
Pension mortgage repayments
With the pension mortgage you are required to take out a personal pension plan or utilise an existing plan to accommodate your mortgage objective. At retirement, your pension will have an element of tax-free cash. You can use all or part of it to repay your outstanding mortgage loan. This is tax efficient; under current tax laws, you get tax relief on the pension contributions and the pension grows virtually tax-free. However, your pension will need to be of a sufficient size to fund your mortgage - and your mortgage cannot be repaid until you reach retirement.
With profits or unit-linked mortgage repayments
Before starting either an endowment or pension mortgage, you face one further choice. What investment type to take? Most companies offer two investment options: with profits or unit linked.
With profits
Premiums are pooled with contributions of other policyholders and invested in a fund across a wide range of investments e.g. equities (company shares), government bonds and property. This approach aims to even out the ups and the downs of the different investment markets.
Unit-linked mortgage repayments
Policies buy units' from a wide rage of individual funds. When the values of the funds change, the price of the units also changes, as does the value of the policy. Because of this if the fund grows at a faster rate than originally assumed, the policy may be of greater value than the mortgage allowing you to pay it off before the term ends. A number of insurers also offer unitised with-profits policies. These are effectively a combination of both types.
Repaying your mortgage with ISAs
ISAs, or Individual Savings Accounts, can invest money in cash, insurance, stocks and shares. Contributions into ISAs grow virtually tax free to provide a cash sum that can be used to pay off the mortgage at the end of its term. If the investment grows at a faster rate than originally assumed, the policy may be of greater value than the mortgage allowing you to pay it off before the term ends. You will need separate life cover.