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I need help in finding out about a policy to pay off my interest-only mortgage which is about 135,000 with 18 years left./ 29.8.2013• A. Velasco• Posted At 04:35 PM

Dear Mr Videtta

Thank you for your question.

There are a number of points to take in to account when looking for a repayment vehicle for your mortgage. Whilst your mortgage is currently on an interest-only basis, it may be beneficial changing this to a capital repayment mortgage whereby the mortgage capital reduces over the remaining 18 years, with the balance fully repaid at the end of the term, provided you have kept up to date with the monthly payments. This option gives you the peace of mind that your mortgage will be paid off at the end of its term.

Deciding which type of mortgage to choose can be difficult as modern mortgages come in all manner of different shapes and sizes. Which one to choose will be based very much on your own circumstances and should always fit with which you feel most comfortable. If for example you prefer the certainty of knowing your monthly payments will always remain the same then a fixed rate mortgage may be the most suitable, or alternatively if you don’t mind your payments fluctuating and prefer to have the potential to take advantage of low interest rates, then a tracker or variable rate mortgage may be your best option.

Alternatively, you may wish to consider a savings plan that will provide you with a lump sum at the end of the mortgage term to repay the outstanding capital. When thinking about investing, there are a number of things to consider. First of all you need to think about how much you need to keep aside for an emergency fund and for any planned expenditure. The thinking is that if you have enough money immediately available then you can think about investing the balance for a longer term to potentially get a better return. Once that’s sorted you need to think about what you want from your investment. How long do you want to invest for? Can you invest it tax efficiently for instance by using your annual ISA allowance.

An Individual Savings Accounts (ISA) is a financial product available to residents of the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding or upon withdrawal. Cash and a broad range of investments can be held and there is no restriction on when or how much money can be withdrawn. A cash ISA is a cash deposit that is similar to any other ordinary savings account, apart from the tax-free status. A cash ISA will remain tax free if you become liable to pay income tax. In the tax year 2013-14, which ends on 5 April 2014, you can put in up to £11,520 into ISAs. Subject to this overall limit, you can put up to £5,760 in a cash ISA and the remainder of the £11,520 into a stocks and shares ISA with either the same or another provider. So, for example, you could put £5,760 into a cash ISA and £5,760 into a stocks and shares ISA, £3,000 into a cash ISA and £8,520 into a stocks and shares ISA or nothing to a cash ISA and £11,520 to a stocks and shares ISA.

There are no hard and fast rules as to which investments are better or worse as their performance can vary over time and their suitability to each investor varies according the investor’s circumstances. When selecting an investment type there are many factors to consider including what access you may need to the funds, what is your attitude to risk, what tax rate you pay etc. The only sure way to find out which is right for you is to speak to a qualified professional.

There are two ways to invest in the stock market – directly or indirectly. Direct investment means buying individual shares which give you a stake in a PLC. Indirect investment involves a fund manager pooling together money from a number of investors and then using this large sum to invest in a whole range of shares. This sort of collective investment spreads the investors’ risk and means that if one share drops in price, the overall value of the fund will be largely unaffected. Additionally, because collective investment funds are run by professional fund managers, they allow individuals with only a relatively small amount of cash to get access to the kind of investment expertise which they would not normally be able to afford. Only invest in shares or stock market funds if you can tie your money in for the long term. Investment advisers believe you should be prepared to invest for at least five years to smooth out short-term ups and downs on the markets. Whether an investor is prepared to invest in direct shares or a collective investment can be dependent on the individual investor’s attitude to risk. An investor must decide how to invest in various asset classes – i.e. through direct investment themselves, by using a discretionary service from a private client stockbroker or using collective investments. For many individuals, direct equity, bond or property investment may be inappropriate in some or all areas, due to the costs of such investment or a lack of time to make the important investment decisions. Investors may still require exposure to these asset classes and potentially will be able to achieve this by investing in collectives. Investors with smaller portfolio’s may find it difficult to achieve the required diversification in a cost efficient manner with direct investment in shares. Collective investments may provide a diversified portfolio for smaller sums. In addition, the use of collectives enables investors to gain diversification of investment managers and styles which may not be possible or practical with direct investment. For individuals with limited amounts of capital to invest, it may be difficult to acquire a sufficient number of underlying equities to ensure adequate diversification. For an individual to acquire a sufficient number of shares to be adequately diversified would require a significant number of purchases at a potentially significant cost. Therefore, a collective investment vehicle, investing in equities, will own many shares in different sectors and will therefore provide a sensible level of diversification. Individual investors may not have the necessary and important combination of time, expertise and preference to manage their own portfolio, and so will usually employ somebody to manage it on their behalf – either a stockbroker or the managers and teams of the collective investments chosen. To follow equity markets effectively can be very time consuming and only professional investors can do this. If a client wished to be more involved with the decision making process within their portfolio, then a direct investment through a stockbroker may be preferable to them . Alternatively, if they wish to remain less directly involved, the a collective investment may be the answer. In either case, you should note that the value of investments and the income from them may go down as well as up and is not guaranteed. You may not get back the full amount invested. Past performance is not necessarily a guide to future performance. Investments in overseas assets carry an exchange rate risk and may cause the value of the investment to fluctuate.

On taking out any savings or investment policy, the provider will set out the charging structure for their product and you should understand the effect on your product before you purchase. There can be a range of charges, such as initial set up charges and sometimes annual management charges which vary from provider to provider depending on the product. In addition there may be a fee paid to the advisor or advising company for advice.

By looking at an investment vehicle for repaying your mortgage, you may be able to repay the mortgage capital early or pay off lump sums throughout the term, depending on the performance of the investment fund. However, if the investment does not perform as expected you may have to increase your contribution or pay in to the investment longer to achieve the desired capital goal.

I hope this answers your question, please feel free to contact me on my contact details below if you wish to discuss this with me in greater detail. This is an area that I can help you with further.

Kind regards

Andrew

Andrew Gurton
Financial Adviser
Shepherds Mutual Solutions
Direct Line 0161 495 6411
Team Line 0800 0921 245

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