Methods of loan repayments

INTEREST ONLY LOANS: With this type of loan the payments are all of interest, with the capital being repaid at the end of the period of borrowing by way of a variety of means, including: -

Endowment Loans: These are the most well-known 'deferred capital repayment' contracts, where a parallel endowment policy is in force and is assigned to the lender (either on a single or joint life basis). Monthly premiums are paid to a life assurance company to provide a guaranteed life cover for the period of the advance and an investment element designed to generate a tax free fund to repay the capital borrowed, and hopefully also to give a surplus to the borrower.

Most lenders will accept 'low cost endowment' policies, where premiums are level throughout the period of the loan, and most will accept 'low start, low cost endowment' policies, where premiums rise by equal amounts for the first five or ten years of the term, then level out for the remainder. In the long run this 'low start, low cost' alternative costs slightly more, it is designed usually for first time buyers with higher income expectation, but it can also be useful for business purchase where income is likely to grow year by year. However, the sale of new endowments is being actively discouraged as a result of poor historic investment performance.

ISA Loans: Individual Savings Accounts (ISAs) are an alternative to the endowment contract and simply represent another way of generating a tax free lump sum at the end of the term of the loan, which can be used to repay the capital sum at that stage. These are considered to be very tax efficient. Life cover should be taken out on all borrowers in addition to the contribution into the ISA. Not all lenders allow ISA loans.

Pension Loans: These are also a form of deferred capital repayment, where, in addition to the interest paid to the lender, contributions are made monthly into a pension plan sufficient to generate not only an annual pension but also a lump sum on retirement (at the chosen age to coincide with the repayment period) such that an agreed percentage of this lump sum can be used to repay the original amount borrowed. Life cover also has to be taken out on all borrowers although the pension arrangement is usually on only one life. This scheme, as well as providing for retirement, is very tax efficient in that the monthly contributions (up to certain Inland Revenue limits) qualify for tax relief.

If there are existing policies in force we can, wherever possible, include them in the new arrangements being made on your behalf. There is a duty of care to give best advice in this area and the company that we introduce you to will ensure that any arrangements that they make are the most appropriate in the circumstances.

True Interest Only Loans: Some lenders allow for interest to be paid during the period of borrowing without any tangible means of capital repayment at the end of the term. This may be because other assets are either to be sold or to be made available to allow repayment of the borrowing from a different source, or perhaps an inheritance is anticipated. In addition, a true interest only arrangement allows maximum flexibility for you to use any combination of the various contracts described above without there being any need for formal assignment to a lender. These options are rare on commercial borrowing.

Thus it will be seen that there are a wide variety of options, but perhaps not all of these will be available to you. We must emphasize that as far as life assurance and pension arrangements are concerned, we act merely as an introducer.