Current Movement in the Endowment Mortgage Market
Nowadays, people considering taking out new endowment mortgages are usually advised that they should be in a position to be able to increase their investment payments during those periods when the stock market is performing badly, in order to avoid the risk of a shortfall, at the end of the mortgage term.
What Endowment Mortgages are Still Available
Some mortgage providers are now offering a variant on the endowment mortgage where an ISA (Individual Savings Account), often linked to a Tracker Fund, is used to repay the capital. This method is tax efficient but can be financially complex, so independent professional advice should be sought if this option is being considered.
The theory is that individuals invest in ISAs, on an annual basis, together with paying their interest-only mortgage payment. For example, if a couple invest the full amount in cash ISAs (currently £3,000 for each individual) over a 25 year period, a couple would have saved a capital sum of £150,000 that would allow them, potentially, to pay off the capital of their mortgage. For those with a larger capital amount, it is possible to save up to £7000 per person with a combination of cash and share ISAs, meaning that a couple could realistically save up to £350,000 tax free to pay off their mortgage, at the end of the term.
Who Should Opt for an Endowment Mortgage
Although endowment mortgages are far less popular than they were during the 1980s and 1990s, a few borrowers are again considering certain types of endowment mortgages. The vast majority of borrowers are now rightly sceptical about the idea of taking an endowment mortgage, but the theory lives on and offers a huge degree of flexibility for the savvy investor.
It is not unusual for investors to pay their mortgage as interest-only and to put in place some other saving scheme such as ISAs or equities to ensure that they have a suitable lump sum at the end of the term. This is hugely flexible and allows an investor to increase or decrease input, as their circumstances change. It does, however, require extreme discipline and a good understanding of the financial markets.
Endowment mortgages are now no longer widely considered as a viable option for most borrowers; but
some individuals use the theory of the endowment mortgage to ensure that their investments are managed in a way that covers the capital sum, but also offers flexibility and opportunity for windfall gains.