| METHOD |
HOW IT WORKS |
SUITABLE IF: |
NOT SUITABLE IF: |
RISKS: |
| REPAYMENT |
You pay off the interest and capital over the life of the mortgage. In the early years you pay mostly interest. Later you progressively start to repay more capital, so the outstanding mortgage balance reduces. |
You want to be certain that your mortgage will be repaid on your chosen repayment date. |
|
None, apart from possible loss of surplus from an investment backed mortgage. |
| ISA |
You pay only the interest on the capital you borrow. You also pay an agreed monthly sum into an ISA. At the end of the agreed loan term, the value of the ISA should be enough to repay the loan. |
You want to combine tax efficiency of an ISA with the potential to gain a tax-free cash surplus at the end of the agreed loan term, or if you think you may want to repay the loan early. 2. |
You do not wish to take any investment risk in repaying your mortgage.You've already taken out an ISA during the tax year and made maximum contributions. |
Any future change in the tax relief on ISA's. The final value of your ISA is not guaranteed and might not be enough to repay the loan in full. ISA's are guaranteed to last until 5.4.2009 but may be discontinued after that date entailing the need for a new repayment vehicle. 3 |
| PERSONAL PENSION |
You pay only the interest on the capital you borrow. You also pay an agreed monthly sum into a personal pension plan. This gives you the option to take up 25% of the benefits as a tax-free lump sum on retirement - and you use this lump sum to pay off the loan. |
You want to combine tax efficiency with the benefits of building up a personal pension and the potential to gain a tax-free cash surplus at the end of the agreed loan term. 1, 2. |
You're in a company pension scheme or ineligible to join a personal pension plan or if the term of your mortgage is not compatible with your intended retirement date. |
Any future change in tax treatment of mortgage interest or pensions. If your circumstances change you may no longer be eligible to contribute and may have to switch to a different repayment method. The degree of risk is to some extent dependent on the type of fund you invest in. 3,4 |
| ENDOWMENT |
You pay only the interest on the capital you borrow. You also pay an agreed monthly sum into an endowment policy. At the end of the agreed loan term, the value of the plan should be enough to repay the loan. |
You want a long-term savings scheme with the chance of a cash surplus at the end of the agreed loan term. Also if you think you might want to repay the loan early (this depends on the policy, so check before you decide). |
You don't need life cover. Term is under 15 years.You do not wish to take the investment risks involved. You require a flexible investment that allows you to reduce increase or stop contributions. |
The final value of your endowment policy is not guaranteed and might not be enough to repay the loan in full. The degree of risk is to some extent dependent on the type of fund you invest in. Many endowments have poor encashment values in the early years. 3 |
