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Endowment Mortgage

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Endowment Mortgage

An endowment mortgage is a mortgage loan agreement under which onlyinterest is paid to the lender whilethe principal repayment installments are paid into a life insurance policy which matures on the same date the mortgage becomes due. The phrase endowmentmortgage is actually not a legal term but commonly used by lenders and consumers in the United Kingdom to refer to this arrangement.

A mortgage endowment is an investment taken out to cover the repayment of an interest-only mortgage when the term comes to an end. Basically with an endowment mortgage, your monthly payments only cover the interest on the loan. They do not pay off any of the capital. At the end of the term, you need to pay off the capital using the money from your endowment policy. In other words, 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. Many lenders charge interest on an annual basis so this is an additional reason in favor of an endowment mortgage. This means that any capital repaid on a monthly basis is not removed from the outstanding loan until the end of the year thus increasing the real rate of interest charged. In such a situation, payments into an endowment might benefit from any growth from the moment it is invested. Therefore, the net investment return required for the endowment to pay the loan, would be less than the average mortgage interest rate over the same period.

Some of the alternatives to Endowment Mortgage are Interest Only Mortgage, Repayment Mortgage and Remortgaging.

Advantages of Endowment Mortgages

  • 1. This policy is flexible.
  • 2. If you move home or change mortgage lender, you can take the endowment policy with you.
  • 3. Endowments usually include some kind of life cover and some also include critical illness cover.
  • 4. You may accumulate more funds than required to repay the loan, if the endowment contract is performing well.

Disadvantages of Endowment Mortgages

  • Endowments are not entirely risk free as there is investment in the stock market.
  • A possibility that your fund may not have built up sufficiently to repay the capital.
  • Keeping a watchful eye on your fund's performance to help prevent this happening.
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