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Mortgage Types and Mortgage Options

This page provides a useful guide on the different mortgage types and mortgage options available to consumers.

Mortgage Types

1. Repayment / Annuity

This is a loan repaid over a certain agreed term. Interest on the loan and the capital ( the sum borrowed ) is repaid in equal monthly/ weekly repayments over that agreed term (some loan terms with certain lenders can extend to 35 years).

Interest is greater at the start of the loan repayments but as the capital is repaid over the period of the loan, the interest reduces. The repayments are evened out over the term of the loan and as long as repayments are made, this type of mortgage is guaranteed to be repaid at the end of the term. It is also the most popular type of mortgage.

2. Investment Mortgage

This used to be called the 'endowment' mortgage. No capital is repaid on this type of loan until the end of the term while interest on the loan is paid on a monthly basis. To counteract the non-payment of capital, a monthly payment is made into an investment fund ( generally with an Insurance company) which grows over the period of the loan. On maturity ( at the end of the term ), the investment fund is transferred into the loan account and there could be a tax free lump sum after this repayment has been made. Warning: There is no guarantee that the proceeds of the insurance policy will be sufficient to repay the loan in full when it becomes due for repayment.

This type of mortgage is popular in particular with commercial borrowings where tax relief on the interest paid on such loans is still available. With the capital static for the duration of the term, it means that the interest is also constant and therefore the tax relief is also maximized.

3. Pension-Backed Mortgages

Similar to the investment type mortgage, the capital is not repaid until pension age ( 60/65 if self employed) has been reached. The most attractive feature of this mortgage is the tax relief received from the pension contributions at whatever level of tax being paid.

On maturity, 25% of your pension fund is available as a tax free lump sum and this is the amount that will repay your mortgage. Therefore, the contributions are geared toward making the sum being borrowed equate with the 25% tax free lump sum available on maturity of the pension plan.

Mortgage Options

1. Variable rate mortgages

The interest rate on the mortgage varies according to the economic conditions and actions taken by both the European Central Bank and fiscal policy.

If you wish to pay off your mortgage, there is no penalty if the rate is variable and for a small fee ( c.€100) you can switch into a fixed rate if desired.

Variable rates are subject to the vagaries of the current market rates and would be less certain than fixed rates.

Warning: The cost of your monthly repayments may increase - if you do not keep up your repayments you may lose your home.

2. Fixed rate mortgages

Loans are fixed for certain periods ( from 1 to 10 years ) during the term of the mortgage. The advantage is that the repayment is fixed for that period and therefore certainty in your funding requirements.

The disadvantage of a fixed loan will manifest when the loan is repaid during the fixed term. Usually there is a penalty of up to 6 months interest on the amount being repaid. This can be avoided if the borrower is just moving home as the lender will usually carry forward a fixed rate to the next home loan.

Warning: You may have to pay charges if you pay off a fixed-rate loan early.


Still confused? Contact Coolbawn Financial Services for more help.

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