Mortgages - Repayment Methods


Endowment Policy
On an endowment policy, repayment is guaranteed on death provided the guaranteed sum assured matches that of the outstanding debt of the loan. On a full endowment, repayment is guaranteed at maturity, and with profits. With low cost and low start endowments, there is no additional guaranteed as growth depends on non guaranteed bonuses.

Who’s an endowment policy for?
  • It isparticularly attractive to those individuals who have a small mortgage to repay.
  • The plan guarantees to repay your interest-only mortgage at the end of the term.
Endowment policies combine savings and life assurance cover; they normally have a minimum term of 10 years, and pay out on maturity. The payout for qualified policies is also tax free. The policies grow via bonuses, normally annually, or terminal, depending on investment performance.

Pension Policy
If a pension policy is used, repayment is from the retirement cash sum, which is tax free. Repayment on death is from a life assurance policy which is linked to the pension policy, repayment at the end of the term is dependant on investment performance. The main disadvantage is that repayment cannot be made until retirement, which at the earliest case is 50, and in most circumstances, cash and pension must be taken together. Such policies are only suitable for people who qualify for an EPP or PPP/Stakeholder, as group occupational schemes are not ussuaily linked to these loans.

Collective Investments
This is a higher risk method, it relies on things such as unit trusts and investment trusts. There is no guarantee that these vehicles will have enough growth, or enough at the end of the term to repay the mortgage fully. It is also a consideration, and for that, and additional cost so look at life assurance. For example, PEP’s were a popular method of a Collective Investments because of there tax free status, but as of 6th April 1999 an alternative method had to be found as no new monies could be invested in PEP’s.

ISAs
As stated above with PEP’s, there are inherent investment risks. Also the government has stated in 2009 that the continuance of ISA’s will be reviewed in 2009, not far off in mortgage terms.

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