Basic Introduction to Endowment Mortgages
Endowment mortgages have gained considerable press recently, mainly due to alleged mis-selling of the policies. For those who have an endowment mortgage, understanding the finer details will become increasingly important, as they try to re-arrange their finances in a way that deals with any shortfall and also secures their ongoing position.
What is an Endowment Mortgage
An endowment mortgage consists of two elements:
an interest only mortgage;
an endowment policy to generate a capital sum to pay off the mortgage at the end of the mortgage term.
On a monthly basis, the borrower pays interest to the lender, plus an additional amount into an endowment policy, usually invested in equities. In theory, at the end of the mortgage term (typically 25 years), the value of the endowment policy will be sufficient to pay off the outstanding balance of the mortgage and even, in some cases, to provide an additional cash lump sum.
It is estimated that there are eight million endowment policies still outstanding in the UK, at the moment. The largest number of endowment policies was sold in the early to mid 1980s, with these policies likely to mature between 2005 and 2010. This means that millions of households are faced with the reality of their endowment policies, good or bad, in the very near future.
Traditionally, an endowment policy was a regular savings plan that included life insurance cover. Premiums were invested in a 'with profits' fund that guaranteed a minimum amount, known as 'the sum assured', when the policy reached maturity. Most reputable funds declared annual bonuses, which were added to the value of the fund. If the fund was well managed, the minimum maturity value of the policy increased, year by year. The value of the policy is made up of the basic sum assured and the cumulative total of the annual bonuses. In addition, a terminal bonus was often added, to encourage policyholders to keep the policy going until its scheduled maturity date.
Other Types Of Endowment Mortgages
Other types of endowment mortgages follow a similar pattern, but instead of using a 'with profits' policy as an investment vehicle, they are associated with a 'unit linked' fund or an ISA (Individual Savings Account).
An endowment mortgage is a simple interest-only mortgage with an attached savings plan that aims to build up enough to pay off the capital at the end of the term; and
endowment policies were extremely popular in the 1980s, meaning that millions of households are reaching the end of the mortgage term.