What is a mortgage with an endowment?
In theory, an endowment mortgage should make your mortgage payment less. Endowment mortgages should be much less expensive than regular mortgages like repayment mortgages. When you get an endowment mortgage, you only pay the interest on the amount you borrowed. On top of that, you pay a small amount more into a policy called an endowment policy, which is meant to grow over time. This policy is meant to grow and grow, and at the end of the mortgage term, you use this money to pay off your capital.
"The customer only pays interest on the money they borrow, which saves them money compared to a regular loan. Instead, they make payments to an endowment policy. The goal is that the money invested through the endowment policy will be enough to pay off the mortgage at the end of the term and maybe even make a profit."
- Endowment Mortgages, June 2006, on Wikipedia
The term "endowment mortgage" is not a legal term. In the 1980s, this kind of mortgage policy was popular, especially in the UK. However, natural fiscal problems and low stock market levels made many of these policies almost worthless. A mortgage with an endowment is always a hit or miss. If they work, they work really well. Things aren't so great when they don't work.
"With an endowment mortgage, the borrower pays the lender only the monthly interest and puts the rest of the money into a policy that is usually invested in stocks. The idea is that if long-term share prices go up, this "endowment policy" should grow enough over the life of the mortgage (usually 25 years) to pay off the capital debt at the end of the term."
- Q & A: Endowment Mortgages, Business Times Online, June 2006
And If My Endowment Mortgage Goes Wrong?
"When you buy an endowment policy, you depend on the stock market and the skill of the policy manager. You must also keep a close eye on how your policy is doing to make sure you are paying enough."
- Q & A: Endowment Mortgages, Business Times Online, June 2006
For example, let's say you get an endowment mortgage. This type of mortgage has been getting more and more attention lately, and some people are starting to think it might be a good idea again. So you get an endowment mortgage and start making regular payments on your interest. You put a certain amount of money into your endowment policy at the same time every month. Only, the stock market isn't doing so well. When stocks are low, the economy drops. After 25 years, you find out that the money in your endowment policy is not enough to pay off your capital. Since 1985, however, all of your interest has been paid in a very nice way. So, what about that loan that needs to be paid back?
You should find some way to pay it off.
"When endowment policies are used to pay off a mortgage, the basic idea is that the rate of growth of the investment will be higher than the rate of interest on the loan. At the end of the 1980s, when sales of endowment mortgages were at their highest, the growth rate expected for endowments policies was high (7-12 percent per annum). By the middle of the 1990s, the economy had changed in a way that led to less inflation. This made the predictions made a few years earlier look like good ones."
- Endowment Mortgages, June 2006, on Wikipedia
"When you got a mortgage with an endowment policy, the goal was for the policy's value to go up over time. But since the value of most policies depends on how well the stock market does, there's usually no guarantee that the value of the policy will be enough to pay off the mortgage at the end of the mortgage term."
- Information for Consumers, FSA, June 2006
