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Mortgages

Mortgages

There are two main types of mortgage, the repayment mortgage and the endowment mortgage. Here is an explanation of their main features.

Repayment Mortgage

With a repayment mortgage your monthly payment consists of one month's interest on the loan and a small amount by way of repayment of the loan. The level of monthly payment is fixed by the lender so that at the end of the term (usually 25 years) the mortgage should have been paid off completely. The usual term of loan is twenty five years but sometimes lenders insist on a twenty year term.

The lender will increase the instalments if interest rates rise and reduce them if rates fall.

Endowment Mortgage

This type of mortgage was very common in the 1980's and 1990's.  However, due to the problems of the stock market and the fact that the investments associated with endowment mortgages failing to perform,  the endowment mortgage is now largely discredited and rarely advisable.

With an endowment mortgage you do not repay any of the loan during the mortgage term. All you pay is interest on the loan. If rates rise you pay more each month and if rates fall you pay less.

At the same time you pay premiums, each month, on an endowment life assurance policy.

An endowment policy is an insurance policy on your life which will pay out a sum of money either on your death before the end of the policy term, or at the end of the policy term if you live until then.

The idea is that the amount you will receive at the end of the policy term should be at least as much as the amount borrowed. The policy must be written so that if you die during the term, the benefit will be enough to pay off the mortgage.  In recent years, many people with endowment mortgages have found however that policy values have not matched expectations.

The amount which becomes due on death or at the end of the policy term is not fixed at the time the policy is issued. Usually there is a guaranteed minimum benefit, and the rest of the amount payable depends on the insurance company declaring bonuses. This happens every so often during the policy term.

When the policy term ends (or on your death if you die before then) the amount paid under the policy is used to pay off the loan. Anything over and above that is yours.   However if the policy value is less than the loan, the borrower still has to pay the shortfall.

Pros and Cons

The advantage of the endowment mortgage is that the amount which, all being well, will be paid out under the life policy is greater than the amount of the loan. You can expect a tax free lump sum once the policy matures. The size of this lump sum is not, of course, known in advance.  The endowment mortgage does of course provide automatic life cover during the term for the lives insured by the endowment policy. A repayment mortgage does not.

If you have a repayment mortgage there is no automatic life cover. If you die during the mortgage term the loan is not repaid automatically. It is wise, therefore, if arranging a repayment mortgage to take out what is called a "mortgage protection policy". This type of policy is much cheaper than an endowment policy.

Anyone taking out an endowment policy must however be aware that there is a risk that the amount to be paid out under the policy at the end of the term could be less than the amount borrowed from the Building Society. If that happens, the borrower is liable to make up the deficiency. 

The problem with endowment mortgages is that there is always a risk that the policy will not produce enough money to pay off the loan. If that happens the borrower must still repay the whole loan.

Because investment returns have been less in the 1990's than in the previous decade, it is now known that some policies are likely to fail to achieve sufficient value to pay of the mortgage debts for which they were written. Endowment mortgages are now very much less popular than they once were. Many major lenders have ceased actively promoting them.     Taking out an endowment mortgage is rarely the right thing to do.

Lenders

Lenders have recognised that the housing market can be a lucrative one for them. As a result they compete for borrowers. While this is healthy, it has brought into the market a number of institutions who do not have the same commitment to home ownership as the more traditional building societies. Some of these lenders approach their customers in a much less sympathetic way, having unusual terms in their mortgage documentation which can be expensive for their customers. For example, some charge fees for granting the loan, and some make a heavy charge if the loan is repaid early when you move house. Some building societies nowadays also have terms of this kind written into their mortgage agreements.

Sometimes these terms are not made clear at the outset, and can come as a nasty shock.

You need to obtain careful advice from a solicitor when choosing your source of money to buy your new home.

Mortgage availability

Young&Pearce have excellent contacts with various lenders and can assist in the arrangement of mortgage loans for clients.