"When choosing a home loan it is easy to forget the most important issue of all; just how you propose to repay it, and the impact of this on your whole financial position," warns Sue Anderson at the Council of Mortgage Lenders (CML).
Miras will be finally abolished from April next year and this will have a significant impact for borrowers.
Ms Anderson says: "In the good old days inflation cut the real value of a mortgage debt, while house prices and earnings kept rising, so there was reason to borrow as much as possible and put off paying it back. Now the emphasis is on clearing your mortgage debt as quickly as possible."
If you choose a repayment mortgage, then your monthly mortgage payments will combine repayment of capital borrowed on the loan with the payment of interest charged on its remaining balance.
At outset, most of a borrower's monthly premium pays interest, but over time the ratio of capital repayment increases. "This is a very efficient means of paying off a mortgage, provided you don't re-mortgage during its first five or 10 years," observes Matthew Ward, at First Active, a telephone-based mortgage lender.
If you choose an interest-only loan, you will need a savings plan to redeem the mortgage at its term, repaying the capital first borrowed.
Both personal equity plans (PEPs), now superseded by the Individual Savings Account (ISA), and personal pensions have been marketed as alternative means of repaying a home loan.
Traditionally low-cost endowments, combining life assurance with a savings plan, have been used for this purpose. Endowments aim to provide a maturity value, usually after 20 or 25 years, sufficient to repay the original mortgage debt. The great majority of these plans are invested into either "with-profits" or "managed equity" funds.
A typical mortgage, again for pounds 100,000 over 25 years, might cost pounds 839.32 a month. This would include interest of pounds 646.66 to the lender, and a low cost endowment with a monthly premium of pounds 192.66.
PEPs provided a tax-efficient alternative to endowments until their abolition on 5 April. However, the new Individual Savings Account can also be used to back a mortgage loan.
Perhaps one reason why so few of us use personal pensions to pay-off our mortgage is their relative complexity, despite the fact that they carry very generous tax relief, whereby the Inland revenue will pay up to pounds 40 towards every pounds 100 of contributions made into a pension. On maturity up to 25 per cent of a plan's fund value can be taken as tax free cash, but most lenders will accept no more than one third of this projected amount against the amount they lend.
A monthly premium of pounds 569, net of relief at the basic rate of tax, would be needed pay pounds 100,000 after 25 years. Including interest payment on the loan of pounds 646 a month, this makes a hefty total premium of pounds 1,212 a month.Reuse content