Endowment Mortgages

With an endowment mortgage, the monthly payments serve two different purposes, firstly some of the amount goes to furnishing the interest charged on the loaned amount, much in the same way as any other mortgage, however the remaining amount doesn't go directly towards repaying the debt, instead it is used to fund an endowment policy.

The endowment policy is paid into throughout the life of the mortgage, with the aim of it being that it matures at the end of the mortgage's term, and the payout from it will be sufficient to repay the entirety of the amount borrowed. A well managed and properly planned endowment should at least meet the target amount, if not exceed it and give the borrower some form of lump sum for themselves at the end of it all, however there have been a number of cases where the endowments have under-performed and left the borrower with a shortfall.

When taking out an endowment mortgage the borrower needs to be aware that there are actually two distinct forms of this, a 'full' type that carries a guarantee that it will provide enough to cover the mortgage amount on maturity, and a 'low cost' type that carries no such promise.

The ways in which both of these types function is much the same, with the endowment itself taking the form of a life insurance saving policy, which is linked in some way to the performance of the stock market. Within this, there are two further options, those being 'with profits' or 'unit linked' denoting the way in which the stock market performance has a baring on the policy itself. The 'with profits' approach smoothes out the ups and downs of the market by retaining profits when performance is good, to use it when there are downturns. Unit linked policies have a direct correlation to the market performance.

Deciding on which type of endowment mortgage to go for can be difficult, looking at it purely in terms of safety - as in being sure that the payout will be enough to clear the mortgage - then a full endowment offers this best, with this actually guaranteed by the lender, regardless of the performance of the endowment. However, this does carry higher costs as the lender is taking on a greater risk, so in terms of cost to the borrower, the aptly titled 'low cost' version can prove to be much kinder to the pocket.

So, if you want secure, go with the 'full' endowment, if you want cheap, opt for the 'low cost' version, right? Well, no. Unfortunately it's not that simple, you see there is of course the risk of a shortfall in the policy to take into account, which could leave the borrower needing to find the additional money to clear the debt, and of course this could easily make the so called 'low cost' endowment much more expensive than the safe option. We did warn you it could be a difficult decision.

Due to the complexity of endowment mortgages, it is highly recommended that borrowers consult with a financial expert prior to deciding if one would be right for their needs. Under the right circumstances this type of mortgage can provide a very effective way to finance home purchase.