Endowment policy mortgages are known as a type of interest-only loan. With a typical fixed-rate mortgage, which is capital and interest, each monthly repayment you make goes toward repaying part of the capital originally borrowed and the interest due for that period. Consequently, this ensures that both capital and interest get 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 an alternative way to pay the balance of the debt, which is where the endowment component of this package is applicable. An endowment policy can be compared to a type of stock market investment that includes life insurance and which runs concurrently with your mortgage.
The concept is that you pay a monthly amount into this policy, the value grows substantially, and at the end of the mortgage term, you are in a position to pay out the outstanding capital.
During the 80s and 90s, endowment policy mortgages were extremely popular as many people believed they were a good way to clear their mortgage debt. Financial advisors anticipated that the investment return would be sufficient not only to pay the mortgage debt but also to provide copious surplus cash for other expenses, such as holidays and new cars.
In reality, the investments didn't deliver the expected returns, and many contributors had outstanding debts at the end of the period. Although these types of endowment policy mortgages are still available, it might be best to avoid them because of the volatility of global stock markets.
What the original creators of the product didn't account for was the unpredictability of the stock market, given its many variables.
When share prices stumbled and values began to fall, the linked endowment investments also fell. Whilst share prices have been rising for quite a few years now, it's unlikely these policies will recover. But for those who invested, their endowment mortgage may have significant shortfalls that will need to be supplemented by other sources.
Regarding 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 is that if you died, the new owner could actually claim your insurance. So you will need to factor in the cost of taking out a new life insurance policy 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 mortgage repayments, your lender will allow the policy to continue with no further payments until the maturity date. This option will affect the 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 considering remortgaging to secure a better deal, you may find it doesn't cost you any more over the remainder of your mortgage.
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