Endowment Mortgages

There’s a lot of confusion about endowment mortgages. There’s a lot of confusion about mortgages generally; but endowment mortgages are a special case. They sound so compelling in theory, but a little bit dicey in practice. So what’s the truth about endowment mortgages?

Let’s get back to basics. You might have heard it described as a lien or a claim against property, but at its simplest, a mortgage is just a loan. A big whopping loan that covers the cost of the house we want to buy. By and large, we repay the sum of the original loan and the accumulating interest in monthly increments, over the period of ten, twenty, thirty years. An endowment mortgage is different. Instead of repaying a portion of the whole loan, the borrower pays off the interest on the mortgage loan and additionally pays premiums into an assurance policy. That means the borrower is tied into two separate arrangements. And this is where the confusion comes about…

The first arrangement is with the lender; and, as with any other mortgage arrangement the borrower is required to pay the lender in agreed increments at an agreed time of the month. The benefit for the borrower is obvious: because they’re only required to pay off the interest on the loan, they pay off much less than the average borrower on a standard repayment plan. As we’ll see there are other potential advantages too…

Then there’s the second arrangement. The assurance policy is a separate savings or investment plan. Using some of the money they’ve saved on the interest only payments, the home buyer pays into the investment policy or savings scheme. Upon maturation of the scheme or completion of the terms of the policy, you’ll be able to fund the repayment of the capital on the house. All being well, it will even exceed the required sum, leaving you with a little something extra to reward your patience.

There are of course variations on the investment plan: your investment plan can be ‘with profits,’ giving you annual, or end of term bonus payments, or ‘index linked’ – in which case the payments are determined by the value of the property on completion of the scheme.

There may be some risks to taking out an endowment mortgage, but as we’ll see, these can be mitigated against with care. For example, a capital shortfall at the end of your mortgage term would leave you with insufficient funds to complete the transaction. And it is this, unsurprisingly, that has dissuaded some home buyers from investing in endowment mortgages. And yet all you have to do is review the policy regularly to ensure that it’s performing as expected. If it isn’t, you can take immediate action to compensate for any shortfall. It’s likely that there will be peaks and troughs in the market throughout the tenure of your loan, so just be prepared to hang on in there and weather the storm. Independent Financial Advisors and the Financial Services Authority can always assist you, and you’ll find no end of help and advice on this very website.

It’s a little bit like playing the markets. So ask yourself this: are you the sort of person who enjoys the sense of playing the percentages for financial advantage? If so, an endowment mortgage could be a good fit for your needs. It’s ideally suited to anyone who appreciates the ebb and flow of the stock market and for everyone who has the inclination to monitor their mortgage on a regular basis. It’s equally good for prudent savers; for anyone who’s wise enough to squirrel away some of the money they’ve saved on their interest-only payments to compensate for any significant dips in the market. And don’t forget: provided the financial markets grow faster than the lending rates, your endowment policy will mature very nicely indeed.

Even if you’ve ever been given some bad endowment advice in the past, there are all sorts of redemption schemes and opt outs if you want to get off the bus. Just remember, don’t act too hastily: if it is properly monitored, and if you’re aware of, and receptive to the potential drawbacks, an endowment mortgage makes for an excellent and potentially lucrative alternative to the standard schemes. It’s the mortgage deal that pays out and pays off for shrewd investors.