What Is An Endowment Mortgage?
What is an Endowment Mortgage? An endowment mortgage is a type of mortgage where the borrower pays back the capital borrowed plus interest, but also contributes towards an endowment policy. The policy builds up a cash sum over the mortgage term which is used to repay the mortgage at the end of the term.
Endowment mortgages were popular in the UK during the 1980s and 1990s, but have since fallen completely out of favour due to the poor performance of many endowment policies.
Can You Still Get An Endowment Mortgage?
It is no longer possible to get an endowment mortgage in the same way it was in the 1980’s and 1990’s. It is however possible to get ‘Interest only mortgages’ and to then explore personal investment to save up the sum required to pay off your lump sum. There is however no link between those policies and that would be purely at the individual’s own risk and planning.
How Does An Endowment Mortgage Work?
With an endowment mortgage, you simply pay off the interest on the borrowed sum itself rather than paying both the interest and a contribution the loan itself which is split evenly though the term of the loan. At the same time as this you have a policy that tries to support raising the capital of the loan over the time period of the mortgage. The two however are not linked and this can lead to discrepancies between the borrowed amount and the amount available from this additional saving.
The performance of the endowment policy is crucial to this process – if it performs poorly it may leave you with a shortfall.
What Are The Benefits Of An Endowment Mortgage?
Endowment mortgages were particularly attractive in the 1980’s and 90’s. Interest rates at those times were rising and there were tax relief options available on premiums paid into an endowment. What was attractive to buyers was the possibility of not only paying off your mortgage but also creating yourself a lump sum at the same time. Some people also found themselves able to pay off their mortgage early due to high-performing endowments with the ability to ‘cash out’.
Some people also found the ability to have some more control over the investment for the endowment more attractive.
Many financial regulators ultimately were said to fall foul of guidance in relation to the advice given when selling or advising endowment mortgages. This often related to not giving enough advice regarding the risks of the endowment not reaching the mortgage owed and of being overly optimistic (probably due to the high-interest rates of the times) in their predictions. As a result, many were subsequently given fines by the regulator.
What Are The Risks Of An Endowment Mortgage?
The primary risk with an endowment mortgage is that the investment (the endowment policy) may not grow at the rate required in order to pay off the mortgage at the end of the term.
This could lead to having to make up any shortfall from your own personal savings or, in some cases, having to sell your property.
How Can You Tell If An Interest-only Mortgage Is Right For You?
If you are thinking about taking out an interest-only mortgage you should speak to a financial advisor to discuss whether this is the right type of mortgage for your individual circumstances.
You should also consider whether you are comfortable with the challenges and risks around such a plan. Interest-only mortgages are less popular than they used to be and therefore you may find yourself in a seller’s market whereby your choice is not very good. You may find that your deposit might be up to 50% and that your interest rate terms are not as good as other options.
It is also important to remember that with an interest-only mortgage you will not build up any equity in your property unless the value of your home increases. This means that if you do need to sell your property or re-mortgage at some point in the future you may not be able to borrow as much as you would with a repayment mortgage.
If you are considering an interest-only mortgage it is also important to make sure that you have a plan in place to repay the capital at the end of the mortgage term. This probably requires another type of investment product to support this saving. It is important to remember that there is no guarantee that your investments will perform as well as you hope and you may end up having to sell your property to repay the mortgage, which was the problem brought about by endowment mortgages.
As terms with interest-only mortgages are often not as good as others, you may be under more pressure during the term of your mortgage. As with any other mortgage if you fail to keep up with the repayments then your home could be repossessed.
What Were The Closing Costs Associated With An Endowment Mortgage?
The closing costs associated with an endowment mortgage were typically higher than other types of mortgages. This was due to the fact that there were usually two products involved (the mortgage and the endowment policy) and therefore you would have to pay for two sets of advice and administration fees.
You may also have been charged an extra fee for having an endowment mortgage, although this was not always the case.
What Happens If You Missed A Payment On Your Endowment Mortgage?
If you missed a payment on your endowment mortgage this would be treated in the same way as if you had missed a repayment on any other type of mortgage. This could result in your home being repossessed.
What Were The Tax Implications Of An Endowment Mortgage?
The tax implications of an endowment mortgage depended on the type of endowment policy that was used. With-profits endowments were typically taxed at a rate of 20%, although this could have been higher or lower depending on your personal circumstances.
If you cashed in your endowment policy before the end of the mortgage term you may have also been liable for an early repayment charge, which could have been up to 6% of the mortgage balance.
Mis-sold Endowment Mortgages
Generous commissions to financial advisors were said to influence the misselling of these financial products in the 1980’s and 1990’s.
Homeowners who took out an endowment mortgage in theses times were often hard-sold the product, without being warned of the fees and charges involved. As a result, many people struggled to pay off their mortgages, as the value of their endowments failed to meet expectations.
Dealing With A Shortfall On An Endowment Policy
Fewer and fewer people are now having to face the problem of endowment shortfalls as the sale of these policies had pretty much ceased by 2001 but 25-year policies mean that a few are still in place. Many people converted their policy into a repayment mortgage many years ago as the publicity around the mis-selling of these policies came to light. Unfortunately though, as time ticks on through the life of a policy it often becomes less attractive to move to a repayment model as it feels like starting again. Some people have therefore found themselves in difficulty.
If you’re dealing with a shortfall on an endowment mortgage, there are several options available to you. One option is to sell your property and use the proceeds to pay off the mortgage. Another option is to take out a personal loan or get a loan from family or friends. You could also try to negotiate with your lender and see if they’re willing to extend the mortgage term or offer a payment holiday. Whichever option you choose, it’s important to act quickly and seek professional advice if you’re struggling to keep up with your repayments.
How Many People Face Shortfalls On Their Endowments?
In previous years financial institutions were encouraged to publish their own data on endowment performances and the percentage of policies failing to reach targets. This has not been the case for over 5 years. In 2017, publications suggested that up to 70,000 people faced not being able to repay the mortgage figure from their endowment. Due to timescales, it is likely the number of these policies is falling off dramatically. Low-interest rates and a recent fall in share performance is probably likely to add to the woes of anyone still holding on to them for their final years.
Claims Management Companies (CMCs)
(CMCs) have often been criticised for cold-calling people with endowment mortgages to try to get them to make a claim for mis-selling. The Financial Conduct Authority (FCA) has now banned CMCs from making unsolicited calls about endowments and other financial products. If you’re contacted by a CMC about your endowment mortgage, you should report them to the FCA.
If you’re concerned that your endowment policy is underperforming, you should contact the provider and ask for a projection of how much it’s likely to be worth at maturity. CMCs can often support cases where there has been a potential mis-selling of an endowment policy.
Ombudsman
The Financial Ombudsman Service (FOS) deals with complaints about financial products and services. In the past, the FOS has received a large number of complaints about endowment mortgages. They can be reached via this link.
If you’re unhappy with the way your lender has handled your complaint, you can contact the FOS. You can also use the FOS complaint form to make a complaint.
The Financial Ombudsman Service can look at complaints about endowment mortgages that were sold from 1985 onwards. If your complaint is about an endowment mortgage that was sold before 1985, the FOS may still be able to look at it if you have new information about the way it was sold.
The FOS will only look at your complaint if you’ve tried to resolve it with your lender first. If you’re not sure what to do next, you can contact the FOS for help.
Conclusion
An endowment mortgage is a type of mortgage where the borrower also takes out an endowment policy. The policy is designed to run for the same length of time as the mortgage, and the aim is to pay off the mortgage at the end of the term with the money that has been saved up in the endowment. However, many people found that their endowments failed to meet expectations, leaving them with a shortfall that they then had to find a way to repay. If you’re facing a shortfall on your endowment mortgage, there are several options available to you, so it’s important to seek professional advice to see what would be the best solution for your individual circumstances.