Endowment Mortgages

This is a mortgage where you pay only the interest to the lender and you use an endowment policy to repay the capital as a lump sum at the end of the mortgage.

Your monthly mortgage payments are lower because you are only paying off the interest but you also pay money on a monthly basis into an endowment policy in order to pay off the capital.

The endowment policy pays a lump sum either at the end of the mortgage term, or if you die, during the mortgage term. The lump sum repays some, if not all, of your mortgage if the endowment policy has performed well. Remember, though, this can not be guaranteed and you may be left with a shortfall left to pay.

 

Equity Release

Equity release plans - also called lifetime mortgages, home reversion or home income plans - are a way of releasing cash, whether to buy that new car, to pay for a holiday or home improvements, or simply to make daily life more comfortable.

These schemes essentially allow you to borrow money against the value of your home, with the debt being repaid from the sale proceeds after your death.

In most cases you will need to be at least 60 years old, have no outstanding mortgage (or you will need to use the equity release money to pay down the existing loan), and own a property in reasonable condition.

Equity release plans can be complicated products and are a major step for many people. Your house is almost certainly the most expensive asset you own; it is also your home. Good advice is therefore key. Age Concern and the Financial Services Authority, the UK's chief financial watchdog, both recommend getting independent financial advice before proceeding.

They can be attractive. They can give a lump sum, a regular income or both. You don't have to move house or sell your home to unlock equity and with reputable equity release schemes there is a rock-solid guarantee that you will be able to continue to live in and enjoy your home until the day you die.

However, equity release will not suit everyone. It is always worth considering whether funds could be raised affordably from other sources before going down this route.

There are a few equity release schemes. The Home Reversion Scheme is where you sell your home or a share of it to a reversion company for a lump sum or in return for a monthly income (or a combination of both). Technically you become a tenant, albeit with the right to continue living in your home rent-free (or sometimes for a nominal rent) for the rest of your life. When the property is sold - usually when you die - the reversion company gets its payout.

With the Interest-only Mortgage you borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.

Home Income Plans used to be the most popular type of equity release plans. You take out a mortgage against your home and use the money to buy an annuity which guarantees you an income for life. Mortgage payments are deducted from this monthly income, although the original capital is only repaid from the sale proceeds, normally after you die.

Lifetime Mortgages give you a lump sum or monthly income (or both). You pay nothing - the interest is 'rolled up' into the loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the property after you die. How much you can borrow depends on the value of your home and your age - the older you are, the higher the percentage of your property's value you can borrow. Generally, you will not be advanced more than 50 per cent of the value of the property.

 

Fixed rates

Your lender may offer a mortgage where the interest rate is fixed for, say, two to three years or sometimes longer so your monthly mortgage payments stay the same during that period.

After the fixed term is over the interest rate you pay will revert to your lender's usual variable rate and will then fluctuate in line with interest rate changes. Alternatively, you could then take out a new fixed-rate mortgage.

There are disadvantages to taking out a fixed rate loan, but these are similar to those associated with discounted interest rates. If the loan is paid off or redeemed within a certain period, the lender will charge a redemption penalty, for instance up to six months' interest on the loan.

Some fixed-rate mortgages are not portable so you have to redeem them each time you move, incurring possible redemption penalties. You may also suffer from having to suddenly increase (sometimes significantly) your monthly payments once the fixed term has ended.

However, this type of mortgage is ideal for those who believe that interest rates are going to rise, or for those who want to know exactly what their mortgage repayments will be for a set period.