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Finance

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Mortgages	Type of Mortgage	Finance	Difficult Cases
Self-Certification of Income Affordability Mortgages Non-Status Mortgages Full Status Mortgages 9.9 x Income Stretches Bridging Finance Secured Loans Second Charges	Buy to Let Home Movers First Time Buyers Joint Ownership Equity Sharing Let to Buy Fixed Rate Flexible Accounts Base Rate Tracker Draw Down Facility Discounted Rates Capped Rates Cashbacks	Capital Raising Debt Consolidation Business Refinance Full Commercial Semi Commercial Overseas Property Off Plan Purchase Self Build	Defaults Mortgage Arrears County Court Judgements Ex-Bankrupts IVAs

Methods of Repaying A Mortgage

There are two basic methods of repaying a mortgage: (i)repayment and (ii)interest-only which uses the proceeds from an investment plan (an endowment, pension or ISA) to pay off the mortgage.

Repayment

The most popular option for mortgage borrowers and has been since the late '90s

Each month you pay a sum of money to your lender, which consists in part the interest you owe on your loan and in part repayment of your outstanding capital debt.

This method of repaying a mortgage is completely safe. As long as you keep up with all of your monthly repayments in full throughout the mortgage term, the loan is guaranteed to be repaid.

A repayment mortgage may intially appear slightly more expensive than an interest-only loan, but most people consider the price well worth paying for the security this type of loan offers.

Bear in mind that if you move home, you will have to cash in your loan and start again from scratch. In the beginning you will predominantly be paying interest, so if you sell up in the early years you will not have repaid much capital. But after a few years you will be whittling away at bigger and bigger chunks of capital, steadily reducing your debt.

Remember, when you take out a mortgage it is important that you also take out a life insurance policy, which will shall repay your debt should you die during the mortgage term. This insurance is imperative if you have dependants.

With a repayment mortgage you have to arrange life insurance separately.

Pros:

Easy to understand
Loan is guaranteed to be repaid

Cons:

Need to start a new loan each time you move
Separate life insurance is required

Interest-Only

Your monthly payments to the lender consist simply of the interest that you owe throughout the mortgage term, and you pay back none of the outstanding debt throughout the mortgage term.

As well as your monthly payment to your lender, you should also make a payment into a separate investment or savings plan (ISA, endowment policy or personal pension), the proceeds of which are designed to repay your loan. The value of the investment may be greater than the outstanding loan, leaving a surplus lump sum.

There are no guarantees that your investment or savings plan will generate enough money to pay off the capital you owe at the end of the mortgage term.

The lender is not obliged to ensure that you have a suitable investment or savings plan in place. The onus is upon you, the borrower, to make sure that you have an investment or savings plan, and to monitor its progress. You may need to increase the amount you put away each month if you feel your investment is not growing as quickly as expected.

Endowment

This used to be the most popular type of investment linked to an interest-only mortgage, but today many lenders don't offer endowments, as there is increasing concern that they won't perform well enough to repay borrower's loans. This is due to falling investment returns.

In recent years endowment providers have been obliged to write to millions of customers, warning them that they are very likely to face a shortfall when it comes to repaying their mortgage.

Pros:

Potential for surplus growth

Cons:

Possibility of insufficient growth

Pension

It is possible to use some of the proceeds of a personal pension plan to repay a mortgage. Since personal pensions have built-in tax benefits, there is the potential for a greater return than from an endowment policy.

You should remember that your pension is designed to provide an income during your retirement years, and there are strict limits as to the amount of money that can be taken as a tax-free lump sum - 25% of the plan's value is the maximum. So, for example, if you had a £100,000 interest-only mortgage backed by a pension, at the end of the mortgage term you would need a pension pot of £400,000 to repay your capital debt.

You must consider whether it makes sense to use a sizable proportion of your hard-earned retirement savings to clear your mortgage. You may need to arrange separate life insurance cover.

Note that mortgage providers are banned by legislation from advertising pension mortgages, which may indicate just how risky this option can be.

Pros:

Tax-efficient investment

Cons:

Uses valuable retirement funds
Cannot access money until you are at least 50
There is no guarantee that your pension pot will grow sufficiently to repay your mortgage debt

ISA

An ISA (Individual Savings Account) is a form of investment that enjoys tax benefits - growth is largely tax-free.

If the plan performs well you could be left with a surplus after the mortgage has been repaid, or you may be able to pay off the loan several years in advance of the expected date.

There are two main types of ISA - maxi and mini - and within each type you can put your money into cash, stocks and shares and life insurance.

The rules surrounding ISAs are somewhat complex but, briefly, since they have tax benefits there are limits on how much you are allowed to invest each year.

There are some 'packaged' ISA mortgages, where the plan includes built-in life or term assurance. Otherwise, if you select an ISA to repay your home loan, you may have to arrange life cover.

Pros:

Tax-efficient investment
Possible surplus lump sum
Possible early repayment

Cons:

Separate life cover may need to be arranged
Tax-free benefits not guaranteed
No guarantee that loan will be repaid

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Refinancing To Carry Out Home Improvements?

Below are the top 10 improvements to a house that can give the best return on investment (based on a typical 1930s three bed, semi-detached home). The higher the 'value factor', the better the return.

Improvement	Value Factor	Average Cost
Central Heating - Radiators and boilers are warm favourites. The best boilers to install are the energy-efficient, gas-condensing type, which use 20% to 40% less energy.	10/10	£2,500
Kitchen - pick the best kitchen you can afford, while keeping your outlay in proportion to your home's value.	8/10	£8,500
Bathroom - Improvements to your bathroom are still a popular choice. Novelty features such as corner baths, sunken basins and whirlpools are in demand.	7/10	£1,500
Insulation - Half of all homes have less than the recommended six inches of loft lagging, three-quarters are inadequately draught-proofed and cavity walls are installed in only one out of five dwellings. Roof lagging soon pays for itself in lower fuel bills.	7/10	£900
Extension - Your home's value depends on its location and condition. Building an extension will increase the value of your home.	7/10	Single storey: £25,000 Double storey: £35,000
Loft conversion - It needs careful planning as, if the job's done badly, it will decrease your selling price and some conversions can look unsightly.	6/10	£17,000
Decorating - This can be one of the easiest and cheapest jobs to undertake. If you're thinking about decorating before putting a house on the market, go for a simple approach and neutral colours.	8/10	variable
New windows - Double glazing provides extra insulation, which helps cut fuel bills. A bonus is that the frames don't rust, rot or need painting. Always have at least one window on the first floor which opens wide enough for you to escape in the event of a fire.	5/10	£5,000
Conservatory - You don't need building regulations approval if your conservatory will occupy less than 30 square metres, but planning permission may be needed, so always check. Ensure it doesn't encroach heavily on your garden space.	5/10	£10,000
Garden Improvements - Buyers go for neat, well maintained gardens, which they can change easily when they move in, rather than those which are over-elaborate or landscaped. Security is important to buyers and floodlighting can be an effective deterrent.	5/10	variable

Check out our Mortgage Calculator to get a guide as to what your repayments might be per month.

Jargon Buster

APR

Annual Percentage Rate: This is meant to be a way of comparing the cost of credit. It takes into account most of the upfront and ongoing costs involved in taking out a mortgage. You cannot always rely on it because lenders work it out in different ways.

Capital and interest mortgage (Repayment mortgage)

Your monthly payments are partly to pay the interest on the amount you borrowed and partly to repay the outstanding mortgage. Also known as a repayment mortgage.

Capped Rate

A mortgage arranged for a set period of months or years which can gou up and down with the variable rate, but there is a maximum (capped) interest rate which it cannot go above.

Cashback

A cash payment you receive when you complete a mortgage. It may be a fixed amount, or a percentage of the amount of the mortgage.

Conveyancing

The legal process involved in buying and selling property.

Discounted Rate

A guaranteed reduction in the standard variable mortgage rate. This often lasts for an agreed period.

Endowment

A life assurance investment policy that is designed to produce a lump sum to pay off an interest-only mortgage. There are different types of endowments: for example, 'with profits'; 'unit-linked': and 'unitised with profits'. There is no guarantee that an endowment will generate enough to pay off the mortgage at the end of the term.

Freehold

This is when you own the property and the land it is on.

HLC

Higher Lending Charge. This is a type of insurance that covers the lender in the event of you defaulting on your mortgage. You pay for it, but the lender gets the cover, not you. It can cost thousands of pounds.

Interest-Only

Your monthly payments to your lender are simply made up of interest. You do not pay off any of the capital debt during the term of the mortgage. You finally pay off the mortgage using the proceeds of a separate investment plan, for example, an ISA, endowment or personal pension.

ISA

Individual Savings Account - this is a tax-free way to own either shares, a cash savings account or life assurance. Depending on the lender, you can use an ISA to repay an interest-only mortgage.

Leasehold

This is when you own the property for a set number of years, after which it goes back to the freeholder. Most flats in England are leasehold.

LTV

Loan To Value - this is the size of the mortgage as a percentage of the value of the property or the price your are paying for the property e.g. a £90,000 mortgage on a house valued at £100,000 would mean an LTV of 90%.

Mortgage

A loan to buy a home where you put up the property as security against you paying back the loan.

Negative Equity

This is where the money you owe on the mortgage is greater than the value of the property.

Repayment

Your monthly payments are partly to pay the interest on the amount you borrowed and partly to repay the outstanding mortgage. Also known as a capital and interest mortgage.

Stamp Duty

A tax you pay on properties which cost over £125,000 (UK Residential).

Variable Rate

The interest rate the lender charges goes up and down, with your interest payments changing accordingly.

Valuation

A simple check of the property for the lender in order to find out how much it is worth and whether it is suitable to lend a mortgage on. You usually pay the bill and you usually get a copy of the report.