Mortgage Information - Endowment

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Endowment Mortgage tax benefits

Endowment mortgages do not any longer have any tax benefits, till recently it was the most common type of interest only mortgage, which also provides life assurance so that in the event of death the mortgage is paid off in full. Fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that, at maturity, the amount invested and earnings are sufficient to pay off the remainder of the mortgage.

There has been a lot of bad press because of the poorer investment growth rates achieved in a low inflationary environment this form of investment is less popular these days. Note there is no guarantee that, when the endowment matures and 'pays out', the balance will be sufficient to repay the mortgage.

More than 50 percent of people taking out a mortgage would have chosen an endowment mortgage, but at the time endowment mortgages had many advantages that made them highly suitable for many people.

As a rule they should not be cashed-in early and certainly not before seeking advice from a suitably qualified financial adviser please call 0845 108 0505. Customer's cashing-in an endowment policy in the first few years after inception can receive less than the amount invested.

Existing endowments can be used to support a new mortgage with any 'additional lending' over the value of the projected maturity balance being covered on a repayment basis or with an alternative repayment vehicle e.g. an ISA. It is also worth pointing out that historically the returns on endowment policies have been pretty good but you do need to let them run the full term.

Click here to find out how much your Endowment Policy is really worth.

The two major disadvantages of endowment mortgages are the fact that it is very likely that the endowment policy will not grow enough to produce a substantial profit over and above the amount of the loan, which therefore means it could become more expensive than a repayment mortgage.

The other major disadvantage is that if you stop paying the premiums in the early years, the cash in value of the endowment policy is very low. Selling the policy could mean that you loose money that you have paid in premiums, and so the endowment mortgage is very inflexible.

Stopping the endowment policy or cashing it in may involve hefty penalties.

Many people with endowment mortgage may wish to consider switching to a repayment mortgage and if you wish to consider this it is recommended that advice should be sought. For a free initial consultation please complete the quick enquiry form for a specialist mortgage advisor to contact you.

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Low cost Endowment Mortgage

This consists of an interest only mortgage linked to an Endowment savings plan, if the endowment policy increases at a sufficient rate then it is expected that the policy will generate enough capital to pay off the loan at the end of the mortgage term, however this is not always the case.

The Association of British Insurers (ABI) introduced a code of practice, which took effect from September 1999, which required an endowment mortgage policy provider to regularly review the policy.
The objective of the review is to analyse whether the policy is likely to be worth enough by the end of the mortgage term to pay off your loan in full.

Under the code of practice, the first policy review should take place by:
1. The tenth anniversary of the policy
2. Half way through the Policy term
3. Ten years before maturity

After the first policy review the rest should take place at least every five years. If the review shows that the endowment policy is unlikely to pay off the mortgage, you may be advised to increase the amount you save each month, which can be carried out by increasing the premium paid into the endowment policy. It is not essential that extra savings are paid into the endowment policy another separate investment can be taken out, such as an ISA.

It is also convenient to link your mortgage to an insurance policy, that automatically gives you life cover, which would pay off the loan in the event of death.

Under a low-cost endowment policy, the amount of life cover, starts at less than the amount of the loan and grows gradually during the term. An endowment mortgage must include a factor of decreasing term insurance to guarantee that the whole mortgage would be repaid in the event of death.

Low cost Endowment Mortgage with Profits

This is the most common form of a low cost endowment mortgage, where at the start of the mortgage the endowment policy has an assured value, obviously far smaller than the amount of your loan. Regular bonuses are credited each year to ensure that the value of the policy increases. These yearly bonuses are also known as reversionary bonuses, and when the policy reaches the end of its term another bonus, known as the terminal bonus is credited to the policy.

Low cost Endowment Mortgage with Units

This type of low cost endowment mortgage is linked to one or more funds of investments managed by the insurance company. These funds are used to invest in shares, and the value of the policy fluctuates along with the value of the investments. If share prices are low at the time the mortgage reaches its end the value of the policy will also reflect this, and therefore may not be enough to pay off the loan.

Due to this, unit linked endowment mortgages are highly risky than with profits, but should you prefer a share- linked investment to pay off your interest only mortgage then, it would be more advisable to opt for a broadly invested ISA.

Thinking of cashing in your Endowment policy? The surrender value of your endowment policy rarely reflects your policy's true value. However, by selling your policy on the open market you could realise up to 35% more!

Click here to find out how much your Endowment Policy is really worth.

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