For most people who decide to purchase their home, a mortgage will be required. How this mortgage will be paid-off is a critical consideration, and one which can be very expensive if the wrong decision is made. Essentially, repaying a mortgage is done in one of two ways, Repayment (capital and interest) or Interest Only (often known as endowment).
Both of these involve ethical considerations, and given their long term nature it is important not to be tied to a scheme or organisation whose ethics you would not approve of, or whose investments compromise your principles.
Payments of both interest and capital are made to the lender. Over the term of the mortgage these payments will reduce the outstanding debt. By the end of the term, the mortgage debt will be completely cleared.
During the term of the mortgage, it is vital for a life assurance policy to be arranged on the lives of those effecting the loan, which would cover the amount of the mortgage in the event of death. Without such a plan, if one of the borrowers dies before the mortgage is repaid, the lender may be forced to repossess the property to reclaim the debt.
Each month, the payments to the lender consist entirely of an amount equal to the interest on the loan. The capital sum borrowed remains unaltered throughout the term.
To ensure that the mortgage debt can be repaid at the end of the term, some form of savings plan is required to build funds over the term of the loan. Traditionally, the plan used is an endowment policy, and ethical versions are now freely available from some of very best insurance companies. There are, however, other plans which can be used to achieve the same result, in some cases with greater efficiency. These include lump sum investments and Personal Pensions. (See Investment & Savings for more information on these areas.)
When assessing the most appropriate repayment method for your mortgage, independent advice is essential. Only an independent adviser is able to look at all of the contracts and schemes available, to find the one most suitable for your needs.
Ethical Investors has now established an Ethical Mortgage department. We are able to offer comprehensive independent advice on borrowing related issues, types of mortgage, pros and cons, and we can arrange for life assurance/investment requirements associated with mortgages. Importantly, we will take your ethical views into account when selecting and presenting lenders to you.