Repayment loans lead the pack

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The Independent Online
The number of endowments taken out has fallen steadily, with less than 50 per cent of new borrowers buying one in the second half of 1995. But the switch has been to repayment loans, with personal equity plans and pension loans both lagging behind. So what are the advantages and disadvantages?

Repayment loans

Cheaper when interest rates are higher.

Life insurance avoidable.

The loan is guaranteed to be paid off within the set term.

When you move home you will have paid off some of the loan, so will have more capital for the next deposit. However this does not work if you move frequently.

If house prices fall, paying off the loan as you go along means there will be less of a problem with negative equity.

Flexibility over payments.

PEP loans.

Cheaper when interest rates low.

A tax-efficient way to build up capital.

Life insurance avoidable.

If the PEP investment performs well you will be able to pay off the loan early.

You have access to the capital, which could be useful to minimise the problem of negative equity.

PEPs are based on stock market investments, which can fluctuate in the short term.

If you lose your job PEP investments will count as your savings and this can affect your entitlement to income support.

Endowment loans

Cheaper as interest rates fall.

Possibility of surplus cash when the mortgage is paid off but do not be impressed by a big figure of extra cash, inflation will make it worth a lot less in 25 years.

Conversely, there could be insufficient money to pay off the loan.

You have to pay for life insurance even if you do not need it (it is part of the endowment).

Inflexible: for full value you must keep the policy until maturity. This inflexibility has exacerbated the problem of negative equity as it is not practical to cash in your endowment to pay off what you owe.

Pension loans

Tax-efficient because you get tax relief on pension contributions.

You have to use the lump sum from a pension scheme to pay off the mortgage and this could reduce your eventual pension income below what you will need.

Inflexible: You cannot get at your pension lump sum until the age of 50 at the earliest.

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