IrishCentral Community News is pleased to continue with our bi-weekly financial column, courtesy of Sean O’Sullivan of Arlington Financial. This time around Sean tackles the ins and outs of home ownership.
A Mortgage In Ireland - Repayment verses Endowment
Is the traditional method of paying back a mortgage?
Each month, you pay a sum of money to your lender, which consists of principal (amount borrowed) and interest (the lenders charge for lending), hence a repayment mortgage.
This type of loan is safe. If you make all your payments throughout the repayment mortgage term and the loan is guaranteed to be repaid at the end of the chosen term.
As the principal balance decreases, the amount of interest payable decreases, and a larger percentage of the mortgage payment becomes available to repay the principal. Normally the first third of a mortgage term is loaded in the lenders favor, wherein almost 80% of your payment goes to the lender’s interest charge.
In addition it is recommended to arrange a separate term life assurance that will pay your loan off if you die – a must if you have any dependents. Term life insurance should be taken out at the same time as the mortgage and normally the premium is fixed for the life of the mortgage. Term life assurance only pays out on the death of the borrower and has no surrender value at the end of the term. As a result the monthly premium is far less than one that has a surrender value. For a joint mortgage, a term life policy can be obtained to pay out on the first or second borrower’s death.
aying on the second borrower’s death reduces the monthly premium substantially.
A repayment mortgage might be the best choice if you intend to stay in the same property for some time.
An Endowment Mortgage:
The original principal balance remains outstanding for the full mortgage term.
The money that would have been used to repay the principal is instead invested in an endowment policy. This money is used to buy stocks and shares.
The hope is that during the mortgage term the value of the endowment policy will have increased to a level where it can be used to repay the original loan and possibly provide a surplus cash amount to the policy holder. It’s important to make sure that the policy has a guarantee, that at the end of the mortgage term, it matures for at least the principal balance due the lender.
Endowment Mortgage Advantages and Disadvantages:
An endowment mortgage gives the borrower a chance of receiving a cash sum over and above the sum necessary to repay their mortgage at the end of the term. The repayment date for an endowment mortgage is fixed no matter how many times you move house again in the future. If you do move again, you simply carry on paying the endowment premiums and take out a new mortgage for the sum required to purchase your next home. Any additional mortgage money required could be borrowed on either a repayment basis or an endowment basis and repaid over whatever term is convenient. An endowment policy includes a life assurance policy which will pay off your mortgage in the event of death, as well as having a savings plan. A medical is required to qualify for an endowment mortgage. May not mature for the principal balance, leaving the borrower to make up the difference due the lender. An endowment policy is dependent on stock market returns, which can be risky.
You can get a mortgage amortized (calculated) over 50 years, the longest the lender will fix the interest rate is 10 years for an “AAA” plus borrower. The other borrowers will only be offered a term of somewhere between 1 and 5 years. At the end of that term the interest rate is readjusted to the then prevailing rate. Most lenders have a minimum term of 3 to 5 years and prefer applications before retirement age of 65, making the age limit around 61 to 62. There are some lenders that will allow borrowing beyond 65 so long as the applicant can prove their income in retirement, so the age limit does not apply across the board as each case is given individual treatment.
For any additional information, or questions regarding other subject matter, contact Sean O’Sullivan at Arlington Financial. Phone: 914-793-1122, email: [email protected]