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Repayment/Annuity Mortgage
The repayment/annuity mortgage is the most
common one. Each month the borrower repays both monthly
interest and a portion of the loan amount. Repayments in
the early years of the mortgage are mainly comprised of
interest. The balance changes to downpayment of the loan
as the period progresses, until the loan is fully paid.
Endowment Mortgage
The endowment mortgage was a popular
option in past years when returns were impressive at a time
of both high interest rates and investment returns.
The product is an interest only mortgage
that is supported by an endowment life assurance policy. The borrower
pays only interest during the term of the mortgage and
the loan amount remains outstanding until the end of the
term. Premium payments are payable on the endowment
policy during the term. The endowment policy is similar
to a life assurance investment/savings policy that is
designed to provide an amount to repay the mortgage at
the end of the term.
In recent years, stories of shortfalls in
the amounts available to pay off loans, have made
borrowers wary of the product.
Pension Backed Mortgages
Pension mortgages are similar to endowment
interest-only mortgages. A pension plan supports the
mortgage instead of an endowment policy. The product is
only available to the self employed or persons in
non-pensionable employment.
The lump-sum portion of a pension plan is
used to repay the mortgage principal. The borrower has
the advantage of gaining tax relief at the highest tax
rate on the pension premiums.
Variable
Rate
The
interest on varaible rate loans can rise or fall
depending on changes decided by the lending institution.
Rate changes are mainly determined by base interest
rates set by the European Central Bank.
Fixed
Rate
The
interest on fixed rate loans are fixed for a specified
term generally ranging from one to ten years. During the
fixed period, payments remain constant. The rate on a 20
year mortgage can be fixed for say 3 or 5 years when
interest rates are unlikely to fall, thereby ensuring
constant payments during the period.
At the
end of the fixed period, the borrower can choose to fix
the rate for another period, using the rate prevailing at
that time. Alternatively, the option of the varaible rate
is available.
If in
the course of the agreed fixed period, the borrower
wishes to pay back the loan or change the agreed rate, a
redemption fee is normally payable.
APR Rate
The Annual Percentage Rate (APR) takes
account of cost outlays that are payable at the beginning
of a mortgage, which are additional to the interest
payable. This is why the APR is higher than the related
standard rate.
The APR is important as it enables
realistic comparisons between the offerings of different
lenders. For example, a special low start-up rate may be
on offer to new customers for a fixed period. As the rate
paid at the outset does not reflect the real cost of the
loan, the APR informs the borrower of the annual
percentage interest rate that may have to be paid in the
future.
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