Mortgages & Property
- Residential Mortgages
- Commercial Mortages
- Overseas Mortgages
Potentially the largest assets you will ever own, it is essential that you plan your property finances carefully. We can help you check that your mortgage, re-mortgage or equity release plans are with the most competitive lender.
Choosing a Mortgage
Taking out a mortgage on a property is a significant financial decision. For many people it represents the largest amount of money they will borrow in their lifetime, so it is particularly important to make an informed decision about which mortgage is best for you.
However, with a large number of different types of mortgages available, and a variety of ways of paying back the loan, choosing the right mortgage may seem rather a daunting task.
When choosing a mortgage, there are key issues to consider, including:
- How do you want to pay back the loan?
- The type of interest you want to pay?
- Which arrangement suits your particular circumstances?
Types of mortgage
With a repayment mortgage, you repay both the interest due and the capital amount borrowed on a monthly basis. The overall sum outstanding reduces over time, until it is finally cleared at the end of the term.
One key benefit of a repayment mortgage is that you can be sure that the loan will be paid off in full.
With an interest-only mortgage, you pay only the interest as it accrues, and simultaneously invest funds elsewhere, with the aim of amassing sufficient returns to repay the capital amount of the mortgage at the end of the term.
It is important to understand that your savings will reflect the performance of the investment fund. Thus, a well-performing fund can result in a surplus at the end of the mortgage term – but equally a fund which performs badly could result in a shortfall. The performance of the investment should be regularly monitored, to ensure that you are still on track to repay the full mortgage.
The repayment of the capital for interest-only mortgages will typically take the form of an endowment, ISA or pension mortgage:
An endowment mortgage involves taking out an endowment policy which provides life assurance cover, and a sum for investing.
This is similar to an endowment mortgage, only it uses an Individual Savings Account (ISA) to invest in stocks and shares, again with the aim of earning enough to repay the loan.
Pension mortgages make use of a pension fund to take advantage of tax-free savings. At the end of the term, the savings are used to repay the mortgage, and any remaining amount is used to provide a pension. See below for commercial property purchase using your pension fund.
Paying the interest
Another key issue to consider when choosing a mortgage is the type of interest you want to pay. Interest rates may be fixed or variable.
With a fixed rate mortgage, the interest rate is fixed for a given time. This can be an advantage if you want to know exactly what your payments are going to be. The main disadvantage is that if interest rates should fall, you will still have to pay your set rate.
Variable rates are normally linked to the Bank of England interest rate, which is reviewed on a monthly basis, so your payments will reflect current interest trends. It is therefore advisable to ensure that you could continue to pay the mortgage should interest rates – and therefore your monthly payments – increase. The negative equity problems in the 1980s arose as a result of increasing interest rates accompanied by a fall in house values.
A number of other interest rate packages are also available, including capped rates and discounted rates.
Investing in Commercial Property
A SIPP allows you to buy a commercial property in a tax efficient way.
If you buy a commercial property the following benefits may be available:
Contributions to the SIPP(s) will attract tax relief at your marginal rate, so by buying a property in this way it allows you to use the tax relief to help towards the cost of buying a property.
The Trustee can lease the property back to a/your business at a commercial rent and the rent is paid into your SIPP(s).
The rent paid is a justified business expense that can be offset against the business income for tax purposes.
Rental income coming into the SIPP doesn’t count as a contribution; it’s just income from your investment. This means that contributions within the usual Inland Revenue limits can continue.
No tax is payable on the rental income when it is received into a SIPP, so any mortgage repayments will be paid out of the gross rental income in your fund.
Key points in commercial property purchase:
* You use the cash in your SIPP(s) as a deposit for the purchase.
The Trustee can borrow up to 75% of the purchase price to help fund the purchase.
The purchase price should be within a margin plus or minus 10% of the market value of the property.
A property can be bought for the benefit of more than one SIPP member.