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Repayment Style

When it comes to actually repaying the mortgage you can choose the method by which this is done.  There are typically two different methods of repaying a mortgage, the standard Capital & Interest or Repayment model followed by most people and the less popular Interest Only mortgage which can be used for investment purposes or a straight forward residential mortgage which is supported by a savings vehicle to maximise tax relief.

Capital & Interest / Repayment Style

This style of mortgage is the one that 99% of people select.  It is a process by which you are not only paying the ineterst on th emortgage itself but you are actually making capital repayments as well.  WIth this type of mortgage the balance that you owe the mortgage company reduces each year.  The first couple of years will not involve a great dela of capital repayment as your first payments will contain a large amount of interest and a small element of capital.  As the small element of capital is paid off the mortgage and as such the balance reduces thus the interest owed on that outstanding balance also reduces.  The following payment is then made up of a slighlty increased element of capital and a slightly reduced element of interest.  This is why when towards the end of a mortgage the balance reduces more quickly as the capital repayment element becomes larger than the interest you are paying.

This is the standard type of mortgage that the vast majority of our clients use, it involves no investment risk and guarantees that the mortgage will be paid off at the end of the term without reliance on stock markets or other investments.

Interest Only

This is the typical style of mortgage used when arranging a Buy-to-Let mortgage but can also be used to support a residential mortgage as long as there also exists some other form of repayment vehicle.  The advantage of this style of mortgage is that because the interest you pay throughout the term of the mortgage remains level, as you are not paying back any capital as you go along, the level of tax relief you receive as a manx resident also remains level.  With a repayment mortgage the level of tax relief (see Isle of Man Mortgages for details of Tax relief) you will receive reduces over time as you recive the relief on the amount of mortgage interest you pay each year.  If the interest you pay is reducing each year your tax relief will do as well.

With an Interest Only mortgage the tax relief remains level throughout the term providing a more tax efficient style of borrowing money.

As the balance of the loan does not reduce through the term of the mortgage the total amount borrowed will be repayable at the end.  WIth a Buy-to-Let style mortgage this is usually covered by the sale of the asset or simply the extension of the mortgage itself.  With a residential property you need to have in place a form of repayment vehicle.  The most popular investment products that are used to support an interest only mortgage are collective investments schemes such as Unit Trusts or OEIC's (Open Ended Investment Company).  Traditionally an endowment policy was used but due to very poor returns and bad press coverage these products are hardly ever sold nowadays but previously existing schemes can still be used to support this type of lending.

Apart from the tax benefits the other reasons that people select Interest Only mortgages are as follows:

- Potential for paying off mortgage early dependent on investment performance

- Lower monthly payments suuitable for Let and commercial properties where equity gain is main aim

- Ability to gear up for maximising investment property portfolios 

Whichever method of mortgage repayment best suits you Financial Options can assist with the whole mortgage process and any associated policies or savings plans, please feel free to call Paul on 01624 612611,  email us at mortgages@financialoptions.co.im or complete our on-line form.

 

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