INTEREST-only mortgages are the most popular home loans with Hong Kong buyers of overseas property, according to a mortgage broker. Jenna Ko, manager of the overseas mortgage department at mortgage brokers Matheson PFC, said most investors in overseas property and half of owner-occupiers opted for interest-only mortgages. Under these schemes, borrowers repay the loan capital as a lump sum at the end of a repayment period, which can vary between 10 and 30 years. During the interim period, borrowers make interest payments on the value of the loan. Interest-only mortgages are paired with capital payment vehicles which act as investments for the borrower. By making regular payments into these vehicles, which can be either endowment policies or unit trust investments, the borrower is theoretically able to build up enough capital to pay off the loan and make some profit. Under an endowment scheme, a home buyer makes regular payments to an insurance company which invests the money to pay off the original loan. Andrew Robinson, manager of Lloyd's Bank (Isle of Man) representative office in Hong Kong, said a big advantage of endowment policies were that profits made from them were tax free and mortgagors could claim tax relief on their interest payments. Ms Ko said the availability of tax relief made endowment policies popular with investors and those owner-occupiers who rented their new overseas homes for a number of years. Endowment schemes can also be transferred from one property to another, allowing the homeowner to sell up, buy somewhere else and continue the same repayment policy. However, endowment schemes came under attack in Britain and Hong Kong during the summer because policies which matured last year failed to cover the loan repayments let alone generate surplus cash. Many borrowers had to take out extra loans to repay their original mortgages. Mr Robinson said that because endowment policies were invested in stock markets they were adversely affected by the slump in share values last year. However, he reminded potential policy-holders that such schemes were long-term investments and judging their performance on one or two bad years was unrealistic. The projected growth rate for endowment policies currently on offer is 7.5 per cent per year. Unit trust repayment plans linked to interest-only mortgages are becoming more widely available to Hong Kong overseas property buyers. For example, private banker Hill Samuel made its Private International Portfolio (PIP) and its Private Unit Trust Management Service (PUTMS) available to the territory's residents earlier this year. Capital and interest repayment was the other main type of mortgage repayment method on offer, Ms Ko said. Under this method, the borrower repaid loan capital from the outset along with the mortgage interest. As the loan capital was repaid, so the interest diminished. However, there was less tax relief in later years because of the declining interest payments.