Title:
Endowment
Mortgages
Word Count:
640
Summary:
Are endowment
mortgages, though highly controversial, on the rise again? Made popular in the ‘80s and used largely in
the UK, what are the risks and benefits of having an endowment mortgage?
Keywords:
mortgages,
endowment mortgages, online mortgages, endowment mortgage advice
Article Body:
What Is An
Endowment Mortgage?
An endowment mortgage, in theory, is supposed to lower your mortgage
payment. Ideally, endowment mortgages
are much cheaper than standard mortgage policies such as repayment
mortgages. When you get an endowment
mortgage, you pay only the interest on the amount borrowed. In addition to this, you pay an addition
small sum into a policy that is supposed to be ever-increasing: the endowment
policy. This policy is supposed to grow
and grow, and at the end of the mortgage term you use this money to pay off
your capital.
“The customer pays only the interest on the capital borrowed, thus saving money
with respect to an ordinary repayment loan; the borrower instead makes payments
to an endowment policy. The objective is that the investment made through the
endowment policy will be sufficient to repay the mortgage at the end of the
term and possibly create a cash surplus.”
- Endowment Mortgages, Wikipedia, June
2006
Endowment mortgage is actually not a legal term. This type of mortgage policy was popular in
the 1980s, especially in the UK, but natural fiscal problems and stock market
lows made many of these policies practically worthless. An endowment mortgage is always going to be
hit or miss. When they work, they really
work well. When they don’t work…then,
things aren’t so great.
“With an endowment mortgage, the borrower only pays the monthly interest to the
lender while investing an additional monthly sum into a policy that is usually
invested in equities. The theory is that
this "endowment policy" should grow sufficiently, with
long-term share price rises, over the course of the mortgage (usually 25 years)
that the capital debt can be repaid at the end of the term.”
- Q & A: Endowment Mortgages,
Business Times Online, June 2006
And If Things Go Wrong With My Endowment Mortgage?
“With an endowment policy, you lay yourself open to the vagaries of the stock
market and the competence of the policy manger. You must also closely monitor
the performance of your policy to make sure you are contributing enough.”
- Q & A: Endowment Mortgages,
Business Times Online, June 2006
Let’s say, for instance, that you get an endowment mortgage. This type of mortgage has been getting more
and more attention recently, and some consumers are starting to think it might
just be a good idea again. So you get an
endowment mortgage and start paying off your interest regularly. With equal regularity, you deposit a certain
amount of dollars into your endowment policy.
Only, the stock market doesn’t do so well. Stocks are low, the economy takes a plunge. Twenty-five years go by, and you discover
that your endowment policy does not have enough in it to pay off your
capital. All your interest has been
paid, quite nicely, for two and a half decades, however. So, what about that capital loan that needs
to be paid off?
You’d better find a way to pay it off…somehow.
“The underlying premise with endowment policies being used to repay a mortgage
is that the rate of growth of the investment will exceed the rate of interest
charged on the loan. Towards the end of the 1980s when endowment mortgage
selling was at its peak, the anticipated growth rate for endowments policies
was high (7-12% per annum). By the middle of the 1990s the change in the
economy towards lower inflation made the assumptions of a few years ago looks
optimistic.”
- Endowment Mortgages, Wikipedia, June
2006
“When you took out your mortgage with an endowment policy, the aim was that the
policy would grow in value. However, as the value of most policies is linked to
the performance of the stock market there is usually no guarantee that the
policy value will be sufficient to repay the mortgage at the end of the
mortgage term.”
- Consumer Information, FSA, June 2006