Different Types of Mortgage
As the repayments continue, obviously more and more capital payments are made. This reduces the outstanding debt and gradually the interest element of the monthly repayment reduces and the capital repayment element increases. As the mortgage reaches the end of its term, almost all of the monthly repayment will consist of capital. As we will see shortly, the ordinary repayment mortgage is the only one of the two main types of mortgage where, if the borrower maintains his monthly repayment through the whole of the mortgage term, he can guarantee that the whole of the mortgage debt will be repaid.
We will now examine why, under the other type of mortgage available,
the interest only mortgage.
Interest Only Mortgages
As its name implies, an interest only mortgage requires the borrower to repay only the interest element within his monthly instalments.
Because the borrower is not paying any capital in his monthly
repayments the monthly instalments are significantly lower than with
a repayment mortgage. This makes the interest only mortgage
superficially popular with people who's mortgage payments are
stretching their resources to their limit. This type of arrangement does, of course, beg the
question of how is the capital element of the loan to be repaid at
the end of the mortgage term? There are various ways to provide for
the repayment of the mortgage at the end of the term. As we will now see, some of these are more effective than others.
Endowment Mortgages
With an endowment mortgage, rather than paying interest to the borrower, the lender will make monthly payments, by way of premiums, towards an endowment policy. Conventionally, this policy will provide for the mortgage capital to be repaid on the death of the borrower (or either of them if it is a jointly held mortgage and endowment policy.
In addition, the payment of the premiums throughout the term is geared to provide a lump sum, which, on maturity, will be sufficient to at least pay off the mortgage loan and perhaps afford an additional sum to the borrower for his own use. Unfortunately, that theory has not always proved to be correct in practice.
The reason for the fact that endowment mortgages have lost a
considerable amount of their popularity is that many people, often in later life, who have retired and are reliant on pension payments for their subsistence, have found that, rather than paying off their mortgage and providing them with a useful nest egg, the endowment policy had proved insufficient even to pay the mortgage capital, leaving them still in debt, sometimes to the tune of several thousands of pounds.
This problem came about because, when the endowment mortgages were
being sold to the borrower, the calculation as to the amount that
would be received on maturity of the policy was based on predictions
regarding the performance of the stock market.
Next