Endowment Mortgages

Endowment mortgages are the repayment to a lender for only the interest rate required from the borrowed sum.  This not only covers the outstanding money owed, but also aims to create further interest to pay off left over capital.

The objective of endowment mortgages is to simultaneously pay off both interest created, as well as saving enough money to cover the sum of your mortgage.  The borrower pays the interest owed to an endowment policy, helping to generate enough income over time to pay of the full mortgage at the end of the term.

The major benefits of endowment mortgages are that in essence they should not only pay off your borrowing amount at the end of the policy, but also leave you with some excess cash to spend on whatever you see fit.  This added perk is the stand out reason why people in the UK opt to take out an endowment policy, however there are other advantages that sweeten the transaction.

Historically, endowment mortgages used to have significant tax incentives that drastically overlooked that of a standard mortgage repayment.  Tax relief’s on premiums meant that those taking out a policy were unlikely to be stung with as much collateral, as the regular method.  This was rarely picked up upon by the media or advertising and was somewhat of an inside scoop.  However, even though the process never conflicted with any legal issues, it has now been reformed so that endowment mortgages are longer a tax haven.

Another significant advantage, especially to those who are entering their golden years or have large families, is the inclusion of a life insurance policy.  This protects your family in the worst possible scenario, and in the event of death the mortgage would be paid off in full.  As morbid as this perk sounds, it is increasingly relevant to a lot people worried about the fate of their loved ones in such an instance.  Other benefits are more dependant on the fluctuation of the market and the strength of the economy.  For example, over time interest rates will generally rise, meaning that at the end of your term your endowment policy should not only pay off your mortgage, but leave you with a large amount of cash surplus.  However, this is conditional on your perseverance with the policy and is a huge contributor to why you should never sell your policy before its completion.

This is not to say that endowment mortgages are for everyone, and they of course have their limitations.  Like any form of credit repayment there are long line of critics armed with various arguments to why this form of borrowing should be steered clear of. Two major disadvantages are that it no longer receives the huge tax benefits that it used to incur and the falling rate of interest rates. The first drawback is one that will often go undetected until the consumer is locked into a policy.  For anyone familiar with mortgage repayments, they will be aware of the notorious tax relief’s that are associated with an endowment policy.  However in consultation, they are unlikely to be informed that this is no longer the case and that statues have been introduced to curb this anomaly.

The second mentioned disadvantage, is wholly tied in with the current economic destitute that we in the UK find ourselves in.  In the heart of a credit crunch, interest rates are falling rather than rising, and have currently stooped to their lowest level for nearly 100 years.  This fact should not go unnoticed by anyone considering taking out an endowment policy in the near future.  Where previously, London stood tall as the economic centre of the world and interest rates rose so swiftly that a policy would not only pay off you mortgage but leave you with a sizable excess, it is now in danger of not even being able to pay off the total sum of your borrowing.  This is called an endowment shortfall and is becoming ever more prevalent in today’s society.  The hysteria created by the recession has frightened consumers into selling up on their policies in fear of being left with a huge financial burden at the end of their contract.

If you are in the unfortunate position of encountering an endowment shortfall then you should contact the Financial Service Authority (FSA).  They will help calm your worries and set in place a plan to remove you from this regrettable situation.