You may have heard of an endowment mortgage, but you might not know exactly what it is. This unique type of mortgage is all over the news these days, and many people don't like it. So, what is the truth about an endowment mortgage, and how does it really work?
Endowment mortgages can be hard to understand, but the way they work is simple. Two parts make them work. On the one hand, they are treated like a simple interest-only mortgage. The borrower pays the lender interest on the mortgage. These interest payments can have any of the same terms as a normal mortgage, such as capped rates, fixed rates, variable rates, and any other special incentives the lender may offer. But the borrower is not paying off his mortgage with these payments, like he would with a normal mortgage. Instead, he is only paying the interest.
The mortgage is paid for separately, and only when it's over. The borrower makes separate payments into an endowment fund over the course of the loan. This money is put into stocks, bonds, and life insurance and left to grow over the course of the mortgage. When the mortgage term is over, the endowment is used to pay off the mortgage.
The problem is obvious: if the investments in the endowment don't do well, the endowment won't pay off the full balance, and the homeowner will still have to pay the rest. Some people don't like the idea of endowment mortgages because the interest rates and stock market are so low right now.
But there are some good things about this strange plan. Your monthly mortgage payments will stay low (just the cost of interest) and won't put a strain on your income over the years. Your endowment money is basically working for you. No matter how well the market does, the odds are good that you will get back more than you put in. Also, people who get endowment mortgages have a few ways to get out of them. If your endowment is already in the works and the stock market is doing badly, you may be able to opt out of your endowment and put your money into a different savings plan that earns interest on your payments instead. It won't make you as much money as an endowment could, but it will protect you from bad investments.
Most lenders will also let you switch your entire mortgage to a standard repayment mortgage, or just the amount of the projected shortfall.
Endowment funds can be a great way for people who are good with their money to pay for a home and come out on top at the end. As with any other investment, it pays to keep a close eye on your money when you have an endowment mortgage.
