Charges & Costs of an Endowment Mortgage
Anybody considering an endowment mortgage should look very carefully at the charges and costs involved, because often they can be significantly higher than for a comparable repayment mortgage.
Because an endowment policy consists of two components (Life insurance and Investment) you might find that you are expected to pay commission to both the life insurance company and the company managing the investments. In addition, many endowment policies are 'front-end loaded' . This means that for perhaps the first two years of the policy all your monthly payments are going towards paying commission and other charges and nothing is being invested on your behalf. With this type of mortgage product, if you need to cash in the endowment policy early, particularly within the first few years, the surrender value will be adversely affected.
As with many other financial products, the conclusion that should be drawn is that you should always read the small print before signing up.
Typical Endowment Mortgage Lenders
Largely as a result of continuing adverse publicity, mortgage providers are not actively marketing traditional endowment mortgages. What the major mortgage lenders now offer are interest-only mortgages linked to other financial products such as ISAs and pensions with which to pay the mortgage loan capital amount.
Because of sharp practice by some financial advisers and insurance company sales staff, compounded by falling stock markets, particularly during the years 2000 to 2003, many endowment mortgages taken out in the 1980s and 1990s are now looking distinctly unhealthy. Many borrowers face serious shortfalls when their mortgage term ends and their loan becomes due for final repayment.
Some financial advisers believe that endowment mortgages can offer advantages over repayment mortgages, so long as borrowers are made aware of all the potential risks.
Not all endowment policies have failed. In fact, those with endowment policies that reached full term in the late 1990s (or at least before the 2000 stock market crash); often made reasonable windfall gains. Potentially, payments made into an endowment policy could perform extremely well and could produce a capital amount greater than the remaining amount on the mortgage, resulting in a windfall gain to spend in any way that the investor chooses.
Endowment mortgages can be more costly in terms of charges, in the initial few years;
most lenders no longer offer traditional endowment mortgages; but
potentially, an endowment mortgage can produce a windfall gain.