Monthly payments are both interest and capital so that by the end of the agreed term, the loan has been paid off

People who do not need the extra life insurance offered by an endowment policy, and who want to be absolutely sure that their mortgage will be paid off at the end of its term

ENDOWMENT

Monthly payments are just interest on the loan. Borrowers also pay a monthly premium to an insurance company for a life policy which should pay off the mortgage when it matures and provide a tax – free lump sum. There is no guarantee that it will.

People who need more life cover and are prepared to accept the risk that the payout at the end of the policy will not cover the mortgage. Doubts have been cast recently about  the suitability  of endowment policies for mortgages.

PENSION

Monthly payments are just interest on the loan. The borrower also pays a monthly pension policy premium and undertakes to pay back the mortgage out of the lump sum released when the pension matures. As with endowments, there is no guarantee that it will.

People who are looking for a particularly tax-efficient way of paying back the loan – pension policy premiums are currently tax-deductable. But this will reduce the amount pension borrowers will have to live on.

INTEREST ONLY

Monthly payments are just interest on the loan. The method of repayment is entirely up to the borrower, whether it be investments, inheritance, trading down to a smaller house or whatever.

People who have no need of additional life cover and want a simple, straightforward simple loan.

FIXED PAYMENT/
STABILISED

Not the same as a fixed rate loan. The rate that borrowers pay is different from the rate they are charged, and does not change. If the charge rate is higher than the payment rate, the difference is added to the loan so that the total amount owed increases. If the charge rate is lower than the payment rate, the extra money goes to reduce the total amount owed. Over the life of a mortgage, the ups and downs should even out.

People who want to know exactly how much their monthly payment will be and whose home is worth more than the mortgage. This is important because when charge rates are high, the total amount owed can increase very quickly. For peace of mind the amount owed should always be less than the property is worth.

DEFERRED LOW START

For a specified period, payment is lower than the charge rate. (see Fixed Payment section) by a fixed amount, but will move up and down as the charge rate moves. The difference between the two is added to the loan, so that the total amount owed increases.

People who are short of funds at the moment but are confident that their income will increase fast enough to cover the higher monthly payments due when their deferred period comes to an end. When rates are high, the total amount owed can increase very rapidly.

Rate changes when interest rates in general change

People who believe rates are going to fall, or who prefer to follow market fluctuations

FIXED

Rate guaranteed not to change for a set period of time. Redemption fee usually charged if loan is redeemed early

People who believe interest rates are going to rise, or who prefer to know exactly how much they will have to pay for a set period.

CAPPED

Rate guaranteed not to rise above a set level (the cap.) but can fall below it if rates in general do. Redemption fee usually charged if loan is redeemed early.

People who want the certainty of a fixed rate combined with the possibility of reduced rates offered by a variable rate

CAP AND COLLAR

Rate guaranteed not to rise above a set level (the cap), but can fall below it if rates in general do. Rates can only fall as far as a lower set level (the collar). Redemption fee usually charged if loan is redeemed early

People who want the certainty of a fixed rate combined with some of the possibility of reduced payments offered by a variable rate.

LIBOR-LINKED

Rate linked to the London Inter – Bank Offered Rate, a money market rate used as the basis for a huge number of transactions. Usually changes every three months

People who prefer their mortgage costs to follow market movements closely and who understand that markets can be very volatile.

FOREIGN CURRENCY

Funds are borrowed in another country, at that country’s rate of interest, and converted into sterling. Monthly payments have to be made in the foreign currency, so they will depend on the foreign interest rates and the current exchange ratetd>

People who believe that interest rates abroad are going to be lower, and are prepared to take the risk that currency movements will not increase their monthly mortgage costs. Only for the very brave.