Mortgage Repayment Options

Let’s take a look at Endowments, ISA’s and Pensions.

Endowment Mortgages

An endowment mortgage is an interest-only deal. Every month you pay interest on the amount owed to your mortgage lender, and invest a sum with an insurance company in an endowment policy. The policy is designed to grow throughout the mortgage period into a sum to pay off your outstanding capital debt (which never reduces) at the end of the mortgage period. The hope is that, having paid off the capital, you will be left with an extra lump sum.

There is no guarantee of this however - you could be left with a shortfall. As a result, endowment policies have become less popular in recent years.

Surrendering endowment policies

People's financial circumstances can change - sometimes for the worse. Endowment policyholders can be tempted to cash them in when in need of extra money.
This is rarely worth doing - and never before the policy has been held for nine years, because you are unlikely to get your money back. And it gets worse - you'll need to make an alternative arrangement to pay off your mortgage.

There are two types of endowment policy:

1. With profits endowment

Your monthly premiums are pooled with the funds of all the other investors. At the end of year, the life company will allocate bonuses to all the investors (depending on the investment performance). Once awarded, these annual or reversionary bonuses can't be taken away.

At the end of the term (when the mortgage is due to be repaid) the life company will pay a one-off terminal bonus. The terminal bonus may represent a large proportion of your final payout (50% or more), but isn't guaranteed.

2. Unit Linked Endowment

Your premiums buy specific units in stock market investments. The value of these units (like the stock market) can go up and down on a daily basis.

Unit-linked funds have the potential for greater and faster growth than the with-profits endowment (possibly leaving you with a tax free lump sum, or maybe the chance to pay off your mortgage early). However, there is also a greater risk that the unit linked policy may not produce such good returns as with a with-profits policy.

Pros

Could make more money than is needed to pay off the capital debt on your home

Could pay off your mortgage early built-in life cover

Cons

Could be left with a shortfall

Inflexible - can't stop and start contributions

ISA

An ISA (Individual Savings Account) is a form of investment that enjoys considerable tax benefits - growth is tax-free. So if the plan performs well you could be left with a considerable surplus after the mortgage has been repaid, or you may be able to pay off the loan several years in advance of the expected date.
There are some 'packaged' ISA mortgages, where the plan includes built-in life or term assurance. Otherwise, if you select an ISA to repay your home loan, you may have to arrange life cover.

Pros

Tax Free investment

Possible surplus lump sum

Possible early repayment

Cons

Separate life cover may need to be arranged

Tax-free benefits not guaranteed

No guarantee the loan will be repaid.

Pension

It is possible to use some of the proceeds of a personal pension plan to repay a mortgage. Since personal pensions have built-in tax benefits, there is the potential for a greater return than from an endowment policy.
But you should remember that your pension is designed to provide an income during your retirement years, and there are strict limits as to the amount of money that can be taken as a tax-free lump sum - a maximum of 25 % of the plan's value.
You must consider whether it makes sense to use a sizable portion of your hard-earned savings to clear your mortgage. You may need to arrange separate life assurance cover.

Pros

Built in life cover

Tax-Efficient investment

Cons

Uses valuable retirement funds

Cannot access money until you are 50

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