Endownment Mortgages

What is an Endowment Mortgage?

Endowment policy mortgages are known as a type of interest-only loan. With a normal type of mortgage which consists of capital and interest, each monthly repayment you make goes toward repaying part of the capital originally borrowed plus the interest due for that period. Consequently this goes to ensure both capital and interest are repaid during the mortgage term.

The difference in having an interest-only mortgage is that you are only making payments on the interest therefore you need to have an alternative way of paying the balance of the debt, which is where the endowment component of this package is applicable. A simple way of explaining it is that an endowment policy can be compared to a type of stock market investment that includes life insurance and which runs concurrent with your mortgage.

The concept is that you pay a monthly amount into this policy, the value grows substantially, and then at the end of the term of the mortgage you are in a position to pay out the outstanding capital.

Do Endowment Mortgages Work?

During the 80s and 90s, endowment policy mortgages were extremely popular as it was thought they were a good way to clear your mortgage debt. It was anticipated that the investment return would be sufficient not only to pay the mortgage debt but in addition to have copious surplus cash to pay for other things such as holidays, new cars etc..

What Happened?

In reality the investments didn't return what was expected and many contributors were left facing outstanding debts at the end of the period. Although these types of endowment policy mortgages are still available it is best to steer clear of them.

What the original creators of the product didn't allow for was the unpredictability of the stock market, given the market is affected by so many variables.

When the share prices stumbled and values started falling, the linked endowments were dragged down with them. Whilst share prices have been moving up for quite a few years now it's unlikely these policies will recover. But for those who invested, their endowment mortgage will have major shortfalls which will have to be supplemented by other sources.

What To Do Now?

In regard to your current endowment mortgage you have a couple of options; you can either increase your payments, which your provider is most likely to recommend. On the other hand, you can cash it in by ceasing payments and taking whatever value for it you can get from the mortgage lender.

Alternatively you could sell the endowment policy mortgage, by putting it up for sale on the open market. However, if this is the option you decide to take make sure you get several quotes first. Remember you will be forgoing the life insurance component of the policy, the reality here being, if you died, the new owner could actually claim your insurance. So you will need to take into account the cost of taking out a new life insurance cover for yourself.

The last couple of options you have regarding the endowment policy mortgage are to talk to your lender about making it paid up. All this means is that if you are struggling with your repayments, your lender will allow the policy to continue with no further payments until the maturity date. This will affect final values of your property. Or simply continue your payments, but continue to look for another source to make up the shortfall which will eventuate on your mortgage at maturity.

If you're looking at the possibility of remortgaging to try and secure a better deal you may find that it doesn't cost you anymore.

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