UK Endowment Mortgages - Mortgage Advice

What are Endowment Mortgages?

There are two main ways of paying back a mortgage, one is a straight repayment mortgage, where your monthly repayments go partly towards paying off the capital that you have borrowed as well as the interest on that amount. The second type is the interest-only mortgage, where your monthly repayments go towards paying of the interest, and at the end of the mortgage term you will need to pay off the capital amount.

For interest-only mortgages, you should open an investment vehicle, into which you pay a monthly sum that aims to build up an amount that will pay off the mortgage capital at the end of the term, and hopefully provide a healthy lump sum for your own purposes.

For this purpose, in the 1980s and 1990s many mortgage borrowers used endowment policies to back up their mortgages. These invested in what was a booming stock market, which generated excellent returns and included life insurance, which was one less worry on the borrowers' back. Many people then sat back, waiting for these policies to generate the cash to pay off the capital as well as leaving them with a fat wodge of cash to spend.

Of course, it hasn't quite happened that way. Whilst no one has actually ended up with a shortfall on their policy, the falling stock market returns mean that many policies (over 5 million) are unlikely to generate enough to pay off the capital. These shortfalls need to be made up somehow.

The Financial Services Authority made endowment providers send out letters to this effect, telling people what kind of growth would be needed in the stock market for their policies to pay off the mortgage. Green meant that if growth was 4% you'd still pay off the mortgage. Amber meant that you needed at least 6% growth, and the red letter meant that even at the high rate of 8%, your endowment won't pay off your mortgage at the end of the term. These letters need to be sent out every two years.

Should you not be on track to pay off your endowment, you should make some arrangements to make up the shortfall. It's not a good idea to throw good money after bad and pay more into your endowment policy, so you could open up an ISA, or another savings account, perhaps with less risk and pay money into that.

As to what you should do with your endowment. Do not surrender it to the provider. You could be penalised and you will only receive the surrender value. Rather, you should sell the policy on the traded endowments market, which can result in anything up to 33% above the surrender value. Don't panic though, but don't do nothing either.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2009

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