Endowment Mortgage

• An endowment mortgage is an interest-only loan combined with an endowment policy

• The aim of the endowment policy is to grow enough to pay back the loan principal after a period of years

• Obviously this will depend somewhat on how well the investments (usually the stockmarket) within the endowment policy perform over the time period of the mortgage

• Money is paid into the endowment on a regular basis and then at the end of the policy term you'll receive a lump sum which is used to pay off the mortgage principal

• Endowment mortgages therefore carry the risk that there will not be enough money built up over the years to pay off the mortgage loan in full at the end of the mortgage period

Types of Endowment Mortgages

All Endowment mortgages provide life insurance, so in the case that you die before the policy ends the insurance will pay out a lump sum that is guaranteed to be at least the amount of the original policy. However if you don't die before the policy matures the sum is not guaranteed and can differ from policy to policy.

Traditional With Profits Policies

• Bonuses added each year

• A final bonus maybe added when the policy matures - The so called terminal bonus

• Investments returns are 'smoothed' meaning some profits in good years are held back in reserve to top up returns in bad years

Unit-Linked With-Profits Policies

• Savings are added to an investment fund similar to a Unit-Trust

• The return that is paid out on maturity is directly related to the performance of the investments in the fund

• In good times it is therefore likely that your endowment will out-perform expectations and vice-versa

• No annual or terminal bonuses, and

• No guaranteed minimum payout (unless you were to die before the policy matures)

Unitised With-Profits Policies

• Bonuses added each year

• As long as you keep up your regular premiums these bonuses cannot be taken away so the unit price cannot fall

• A terminal (final) bonus may also be paid in the final year but this depends on which lender you do business with

Advantages of Endowment Mortgages

• Investment out performance can mean that you could theoretically not only pay off the mortgage principal when the policy matures but also be left with a cash lump sum. This outcome though should not be expected or even assumed

• Portable - You can take your endowment policy with you when you move or switch to a new lender

• Self-Administered - With unit-linked funds you can often switch between investment funds on the stockmarket, perhaps into the American market or add more money to bonds etc. This type of strategy though should only be considered by people with experience of the investment world

Disadvantages of Endowment Mortgages

• Inflexible - In normal circumstances if you cash in your policy early there are severe financial penalties

• Charges - Very high fees were levied when endowment mortgages were first offered but due to competition these are now far better value

• Tax - Endowments are far less tax-efficient than ISA mortgages

• No guarantee that the endowment policy will grow at an expected rate thereby there is the possibility at maturity that there is not enough money in the pot to pay the loan back

• Too Damn Complicated - Even the writer of this guide struggles to understand them!

Endowment Mortgage Reviews

Endowment policies which are subsequently used to pay off a mortgage loan are reviewed at least every 2 years. These reviews are needed to make sure that the endowment policy is on target to repay the loan when it matures.

If your endowment policy is not performing well then you will receive notification of this fact from your policy company which will include steps and ideas on how to proceed. If you are concerned that your endowment policy is not or has not performed well then do not consider cashing in the endowment until you have received proper financial advice as to the consequences and other options open to you. This is a critical point to note.