History of the Endowment Mortgage
In the case of endowment mortgages, looking at the background is actually quite important. The decision to take an endowment policy was made 25 years ago, yet the impact is being felt NOW. For this reason, understanding the background and the theory, may allow policy holders to deal with their own situation at the end of the mortgage term.
When, Why and By Whom Were Endowment Mortgages Introduced
Low cost endowment mortgages were introduced to the British market in the late 1970s. Originally, most endowment mortgages sold were linked to 'with profits' policies. However, by the late 1980s, many mortgage providers had switched to 'unit linked' policies where their value followed fluctuations in stock market prices much more closely.
Endowment mortgages were taking 64 percent of the new mortgage market by 1993. However, by 2000 the number of endowment mortgages sold annually had halved and by 2003 the bubble had burst. Large numbers of endowment policies, both 'with profits' and 'unit linked', were no longer valuable enough to pay off their associated mortgage loans.
When endowment mortgages were introduced, they offered borrowers lower monthly repayments compared with supposedly equivalent repayment mortgages and also the promise of an additional cash lump sum, at the end of the mortgage term.
Endowment mortgages were originally introduced by the life insurance companies in order to gain a foothold in the ever growing and increasingly profitable mortgage market. Whether sold by insurance company sales staff or independent financial advisers, endowment mortgages were almost always sold on commission. This business model led to widespread mis-selling endowment mortgages. According to surveys carried out by the Financial Services Authority (FSA) and the Consumers' Association, around 60 percent of customers were told categorically that their endowment policy would pay off their mortgage loan, at maturity.
Endowment Mortgage Poor Marketing
Because of the way that endowment mortgages were marketed, many borrowers were blissfully unaware of the dependence of their endowment policy on stock market investments and had no idea that their mortgage loan would not be repaid in full at maturity, if the stock market performed poorly.
The true impact of the endowment mortgage situation is only becoming clear as the mortgages are reaching their full term;
during the 1980s and 1990s endowment mortgages made up more than 60 percent of the mortgage market; but
since 2003, endowment mortgages have all but disappeared and been replaced by alternative mortgage products.