Although mortgages are not currently regulated in Gibraltar, the provision of investment advice in relation to endowment policies used for this purpose is. The FSC has therefore considered that investors will probably find the following guide useful.
There are essentially two types of mortgages currently sold in Gibraltar – endowment mortgages and capital repayment mortgages.
An endowment mortgage is an interest-only mortgage i.e. the home owner is required to make interest payments throughout the term of the mortgage but does not pay off the actual capital borrowed until the end of the term. Instead an endowment policy is taken out, the sum of which is to build a large enough investment to repay the capital at maturity. In an Endowment Mortgage the homebuyer would normally be required to obtain an endowment policy with the sum assured being equal or greater than the capital balance borrowed from the bank or building society.
During the term of the mortgage payments, the home owner will be paying only the interest accumulated on the capital balance owed to the bank plus the premiums due on the policy. At the end of the term, the amount received from the maturity of the policy will be used to repay the balance owed to the bank. Due to the nature of an endowment policy the amount due at maturity is not guaranteed and therefore it is your responsibility to make sure you have enough money to repay the mortgage at the end of the term, otherwise you could risk losing your home.
Currently tax relief is available in Gibraltar on both the premiums paid towards the endowment policy (if eligible) and the mortgage interest payments (if eligible). Tax rates and eligibility are subject to change. Whether an interest-only mortgage suits you depends on whether you're comfortable with taking the risk of repaying your mortgage with a savings plan the return of which is not guaranteed. You may need to increase your premium payments if the investment is not performing well. If you are not comfortable with this risk, a repayment mortgage is likely to be a better choice.
A capital repayment mortgage is a type of mortgage where both interest and capital payments are made throughout the term of the mortgage. The capital balance due, and the interest due on this, would reduce accordingly. Your monthly payments gradually pay off the amount you owe as well as paying the interest charged on the loan. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term. In a capital repayment mortgage, the home buyer would not need to commence an endowment policy. In some cases, however, the lender will require, or strongly recommend, that the home buyer take out life insurance.
You should consider opting for a capital repayment mortgage if you want to be absolutely sure that your loan will be fully repaid at the end of the term. You should note however that monthly payments could increase if interest rates rise.
Currently tax relief is available in Gibraltar on the mortgage interest payments (if eligible). Tax rates and eligibility are subject to change.
What to do ?
When asking for financial advice in relation to a property purchase you should consider both of the above options. Your financial adviser should therefore provide you with an illustration under both methods.