Repaying Your
Self Certification Mortgage
A mortgage loan is likely to be the
largest single credit agreement that you take out.
One of the important decisions to
make is how your mortgage will be paid off.
The choice is between “interest
only” or “capital and interest”.
Capital and interest basis;
Each mortgage payment consists of mortgage interest plus
a small repayment of capital. The capital balance
reduces over the course of the mortgage down to zero at
which point your mortgage is cleared.
You can arrange your mortgage on an
interest only basis. You just pay the interest
back to the lender. This will minimise your mortgage
payments but the capital is not being repaid. How will
you clear your mortgage with an interest only mortgage?
Some people will save regularly
into ISAs or endowment policies and over the term of a
mortgage will expect that their savings will exceed the
mortgage balance. Of course, there is not guarantee of
this and the adverse publicity surrounding endowment
policies mainly centres on them not fulfilling their
objective of not replaying the mortgage.
ISA stands for Individual
Savings Account. ISAs are tax free accounts inside of
which you can keep a range of investments. The range of
investments will depend upon your attitude to risk. The
plan here is for your investments to grow over time and
to clear your mortgage at some time in the future. The
safer the investments the more cautious the investment
returns tend to be. You should discuss this option with
an Independent Financial Advisor.
Endowments. These are investments
that include life assurance. They attract bonuses
annually that accrue steadily. Because of their steady
growth they are regarded as a lower risk investment. But
as reported in the press recently, adverse Stock Market
performance has caused some of these investments to
under perform. Again you should discuss this option with
an Independent Financial Advisor.
Pension. A stakeholder or personal
pension can be used to clear a mortgage. On retirement
you can draw up to 25% of your pension as a tax free
lump sum. You can use this lump sum to clear your
mortgage. One of the principal advantages of using this
method is the tax relief which everyone receives on
their pension contributions. For example, for a higher
rate tax payer, this means that for every £60 put into
the pension. The tax relief allowed means that £100
actually is credited.
One disadvantage of this method is
that you can only draw your tax free lump sum when you
draw your pension. Drawing money from your pension will
reduce the pension payable to you. You can draw up to
25%. There is no guarantee that your pension pot will
be sufficient.
Interest Only. Some people choose
interest only as a means of keeping their mortgage
affordable. This might be acceptable as a temporary
solution for a young person, but is not a long term
solution. While inflation will reduce the debt so that
it “feels” smaller, the debt will still be there. Most
people’s income will drop dramatically at retirement and
it would be sensible to have cleared your mortgage by
this time.
Term. It is usual to choose a term
of 25 years for a mortgage. You can choose a shorter or
longer period. If you reduce the term of a Capital &
Interest mortgage, your mortgage payments will rise. If
you extend the term your monthly payments will fall.
This is because you are paying off the capital sum over
a shorter period. If you choose an Interest Only
mortgage, the term will make no difference to your
monthly payments as you are only paying the interest.
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