Guide to Endowment Mortgages

2007-03-08 10:33:40

( Financial )



Endowment mortgages became popular during the 1980s as another option for paying mortgage loans. To fully understand what endowment mortgages are, you must take note that they are composed of two separate arrangements. The first is with the provider of mortgage loans for the advance of the initial lump sum and repayment mortgage interest. The second deal is with the endowment policy’s insurer. In this arrangement, only the interest of the money borrowed is paid to the lender, while the rest of the mortgage amount is expected to be paid by one or more endowment policies, which are usually invested in stocks. Endowment mortgage is term commonly used by consumers and lenders in the UK to refer to such scheme, but is not a legal term.

Benefits of endowment mortgages

More money is saved in an endowment mortgage arrangement compared to a regular repayment loan, since you only pay for the interest of the money you borrowed. The amount that you pay for the endowment policy, which is aimed at increasing over time to be enough to repay your mortgage, sometimes creates a cash surplus at the end of the term of the mortgage loan.

Some endowment mortgages, including the Life Assurance Premium Relief, are also eligible for tax benefit on the premiums. This tax relief is one of the attractive features of some endowment mortgages over the ordinary repayment of mortgage loans.

Risk linked to endowment mortgages

During the 1980s-1990s, endowment mortgages became popular because the stock market was robust. The idea that investment in endowment mortgage policy would repay the capital at the end of the loan term was plausible. However, the crash of the stock market during the late 1990s illustrated that endowment mortgages were risky since they counted on share markets increasing faster than bank lending rates. Since the value of the endowment mortgage policy is linked to the performance of the stock market, the probability of an endowment mortgage shortfall (the value of the endowment policy at the end of the loan term is insufficient to pay off the capital) is present.


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