Select The Right Type Of Mortgage

Note: If you select the right type of mortgage for your circumstances it will help you to save money and repay your debts over a shorter period of time. This article explores the different types of mortgage that are available.

The Right Mortgage For Your Circumstances

The vast array of mortgage products that are available these days makes your choice incredibly complex. Repayment or endowment? Low-start, low-cost, flexible, current account mortgage, etc. And that’s before we have even considered the interest rate details!

The whole situation is very confusing, unless you are well informed. Perhaps that is the aim of the industry! After all, it reinforces the need for financial advisors, mortgage brokers etc. It also means is that you may unwittingly end up with a mortgage product that doesn’t suit your needs. Roughly translated this means that it will be costing you more than is necessary.

Unless you know exactly what type of mortgage will best fit your needs, it can often help to use the services of a mortgage broker. Their knowledge of the industry and bulk bargaining power can often result in a better deal than you could achieve through your own efforts.

But before you decide upon your mortgage, consider these three points

The main choice is between a repayment mortgage and an endowment mortgage. A repayment mortgage does what it says on the tin. Each monthly repayment covers the interest that has accumulated on the debt and repays part of the original capital sum borrowed. So over the term of the loan, typically 25 years, the amount borrowed is gradually repaid.

If the interest charged on the loan changes the monthly repayments are recalculated to ensure that the debt will be reduced to zero by the end of the agreed loan period.

An endowment mortgage is an entirely different beast. It’s often called an interest only mortgage, which is a better description of what it does. Each month the borrower only repays any interest that has accumulated on the debt. These payments only keep the wolf from the door; they do not reduce the amount owed.

The borrower then has to find a way to repay the original capital sum by the end of the agreed loan period. This is usually done by paying into a monthly savings scheme (an endowment, that incorporates life insurance that will repay the mortgage if the borrower dies) run by an insurance company. This money is invested by the insurance company in the world’s financial markets. At the end of the mortgage term there should be enough to repay the debt, and perhaps provide an extra capital sum.

Well, that’s the theory anyway! The reality over recent years has been rather different.

Millions of borrowers have been hit by the sudden realisation that their endowment policy will not be able to repay their mortgage. In some cases this shortfall runs into tens of thousands of pounds. What an extremely unpleasant shock for those who assumed that after 25 years of paying their mortgage they would actually own their own home!

Through a combination of mis-selling, falling stock markets, unwise product construction and over-optimistic assumptions about investment returns, endowment mortgages have left many ‘home owners’ in a precarious financial position as they near retirement. Changes have been made to the system of endowment mortgages but it’s enough to say that at present repayment mortgages are by far the most popular option for borrowers.

Endowment policies can make a profitable investment, BUT ONLY if they’re held for the full term until they mature. This is essential in order to receive the terminal bonus that insurance companies add to the proceeds of policies that have matured. Due to the high cost of fees and upfront commission that is taken from the premiums during the early years of these policies, it may take until perhaps the tenth year of a twenty five year policy for the investment to move into profit.

In other words, any policyholder who sells their policy within that time is likely to get back less than they have paid in premiums. When you consider that around 40% of endowment policyholders get rid of their policies within THREE years, it’s no surprise that they’re so unpopular.

If you have an endowment mortgage, keep reviewing the progress of your endowment policy. Make sure that it’s on track to provide enough money to repay your mortgage. If it’s underperforming then take steps to rectify the situation. If you decide that you want to want to get rid of an endowment policy, because it’s underperforming or you can no longer afford to pay the premiums, make sure that you take independent financial advice before you proceed any further.

Whatever you do, NEVER surrender an endowment policy back to the insurance company. You’ll be offered an extremely poor price for it! It’s nearly always possible to get a much better offer by selling your policy on the open market. There are many organisations that are prepared to buy them and continue paying the premiums as an investment. You could receive up to 30% more than the insurance company has offered.

Next: Repayment Mortgage Options

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