Home truths about purchasing property

Home truths about purchasing property: A mortgage is probably the biggest financial commitment most of us will ever make.

The main types of mortgage are:

Repayment: Both the capital borrowed and the interest on the loan is paid off at the same time. Considered a safe bet, repayment mortgages are considered a good idea if the buyer doesn’t have much money to start with.

Endowments: You pay off the interest charged on the loan and at the same time pay monthly premiums on a life insurance and savings policy which should, at the end of the term, provide enough money to pay off the capital borrowed.

Interest-Only: You pay the interest charged on the loan and nothing else.

PEP: Each month you pay the interest owing on the capital borrowed and at the same time pay into a personal equity plan which should provide enough tax-free cash to pay off the mortgage at the end of the term.

Pension: Again, you pay the interest charged on the loan and at the same time pay extra into your pension to build up a tax-free cash lump sum which will pay off the loan on retirement.

The best mortgage for you depends on your own individual circumstances - your age, marital status, size of family, how much you earn, salary aspirations.

Below is a rough guide to some of the pointers to consider.

Single, mid-twenties, no children:

Repayment: Safe option, but you pay off very little of the capital borrowed in the first few years, so frequent movers don’t build up any equity.

Endowment: Useful only if you are a committed home owner and won’t want to cash the policy in early - advantage is you get life insurance built in and over the long term returns paid out should be reasonable.

PEP: A riskier option - they can go down in value as well as up suitable for those who can afford to invest reasonable sums and who will keep a close eye on returns.

While it is the cheapest and most flexible option, you can must be a disciplined saver.

Interest-Only: Should be considered only by disciplined savers or those who know a cash windfall can be counted on to repay loan or can save up to provide such a windfall.

Pension: Useful for those like accountants and solicitors, who will remain self-employed all their working lives, but less so for those who switch jobs and types of pension funding.

Married, twenty to thirty, no children:

Repayment: Definitely worth considering. Virtually no capital made for first few years so it won’t be until you have made repayments for more than five or six years that you start to build up equity.

Endowment: Policies are difficult to split on divorce or separation over the long term should provide the money to pay off the loan and some extra cash.

PEP: A higher risk option - as capital content can fluctuate sharply - suitable for disciplined savers. Must keep an eye on PEP investments as different sectors and areas can fall dramatically in value.

Interest-Only: A flexible option for those whose income is likely to increase rapidly over the next few years and who are happy to fund a regular savings programme alongside.

Pension: Not the best option as premiums on a personal pension mortgage start high as only a quarter of the fund can be paid in cash and used to repay mortgages. It is inflexible and means you cannot take any cash until retirement age.

Married, thirties to forties, children

Repayment: Good option and by this stage you should have built up some equity so you don’t have to worry. Remember to take out extra life and redundancy cover.

Endowment: One drawback is that medical problems can mean higher premiums at a time of life when premiums are becoming more expensive.

PEP: While it is the best value option on paper, remember risks are higher and there are no guarantees. Also, if you think you could be tempted to cash in all or part of the PEP it’s not the mortgage for you.

Interest-Only: Not the most favorable option as you are not repaying any of the capital borrowing, or saving up to be able to do so. However, it makes sense if you expect a cash windfall later in life that could pay off the loan.

Pension: Inflexible, as cash can be taken only at retirement and you are linking your pension and mortgage - so your pension income will fall.

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