Different Types of Mortgage
At the time these forecasts were made, probably quite genuinely by the vast majority of mortgage and/or insurance brokers, it seemed reasonable to assume a certain amount of stock market growth. In the event, the reality was that the markets shrank. This in turn significantly reduced the value of the endowment policies, which was based entirely upon the performance of the markets. For this reason, many people have had to find funds from their own personal resources to discharge the balance still owing on their mortgages at the end of the term after the endowment policy has been surrendered. Unsurprisingly, for that reason the endowment mortgage has lost much of its popularity and as the uncertain nature of the stock market's performance has become more palpable to the general public, it is unlikely that that popularity will ever return.
There is another type of interest only mortgage whose efficacy is based on the performance of the markets and this we will now look at in some detail. It is the Pension mortgage.
The Pension Mortgage
The pension mortgage has certain similarities to the endowment mortgage, the main and most obvious one being that the monthly repayments required to be made consist of interest only,
but there are also certain significant differences.
We will now seek to examine the pension mortgage in some detail and
to examine just how effective it can be in ensuring that the mortgage is repaid in full at the end of the term.
However, before doing so it s worthwhile to look at the law in the UK in relation to pension policies. In basic terms, a person can pay money into a private pension, which can be cashed in when he reaches pensionable age. At the present time in the UK the earliest date that a person can cash in his pension is 55. This means that, when a pensionmortgage is being taken out the borrower must be aware that the pension policy will need to last at least until his 55th birthday and that the mortgage will not be required to be repaid before that date. When the pension policy is cashed in the borrower will receive a lump um, representing one quarter of the pension pot and the remaining three quarters is used to purchase an annuity, which will provide the borrower with a monthly pension payment.
The pension mortgage has one significant advantage above the
endowment mortgage. This is that the pension premiums attract tax
relief for the payer. This can result in a significant saving,
particularly if the pension holder is a higher rate taxpayer. These
savings can be significant also because, as we will now examine, the
premiums required to be paid can be very substantial indeed and can
be required over a very lengthy period of time, sometimes even demanding
that the borrower put back his planed retirement date.
The first disadvantage of pension mortgages is that, just like endowment mortgages, the value of the fund that will be available to discharge the mortgage debt at the end of the mortgage term, depends
upon the performance of the stock market throughout the life of the mortgage.
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