Repayment Options
Endowments | With
profit | Low cost
| Unit linked |
Other | Advantages
| Disadvantages
Introduction To Endowment Mortgages
Endowments are still the most popular form of investment
used to pay back an interest only mortgage. They are essentially
an investment product designed to generate sufficient funds
to pay back the loan at the end of the term, or earlier
if you die.
As with other interest-only mortgages, you pay interest
to the lender on the full amount of the capital for the
entire duration of the loan term. The remainder of your
monthly payment goes towards a premium for an endowment
policy.
A portion of this premium is invested into some form of
fund that is eventually used to pay off the capital owed
to the lender. At the beginning of the policy, the provider
will make some assumptions about the growth rate of the
investment. There are often a variety of different assumed
rates of growth for you to choose from. The rate is used
to calculate how much your repayments need to have enough
money to repay the loan at the end of the term.
Whether or not your repayments will actually be enough
to reach the level of your loan is not normally guaranteed.
However, with good fortune and skilled management, hopefully
the investment will grow faster than the projections used
when the loan was taken out, thereby leaving you with a
cash lump sum at the end of the term.
The size of the premium is affected by the growth rate
by which your fund is expected to grow. The higher the assumed
growth rate, the cheaper the premium - you are relying more
on favourable market conditions and the prudent investment
skills of the fund managers than on the amount of money
you pay in. However, a higher assumed rate of growth brings
a greater risk that the investment objectives will not be
reached.
If the assumption is that the growth will be slower, your
premiums will be more expensive, as you must contribute
more money to compensate for the 'probable' inferior rate
of growth. But to compensate, this brings a greater likelihood
that your fund will exceed the performance necessary to
repay the loan at the end of the term. If this is the case,
then there will be a cash surplus left over, which you can
keep - with no tax to pay! Given the experience of the last
decade, which has seen some advisers underestimate the amount
of funds needed to generate sufficient money at the end
of the term, it is probably always best to err on the side
of caution.
Not all of the premium goes towards the investment side
of things, as a portion of your monthly payment is used
to pay for a life assurance policy that is designed to ensure
the full amount of the loan is repaid if you don't survive
to the end of the repayment term. Life insurance is an integral
part of the endowment product, not an optional extra. You
cannot have an endowment without the life assurance element.
If you really don't want to pay for life cover, don't get
an endowment.
With an endowment policy, the length of the repayment
term is fixed and cannot usually be altered. You can take
the endowment with you if you move to a new home, though
you may need to top up the payments if you add additional
borrowing to your mortgage. You can keep on raising the
amount you pay into it each time you trade up to a more
expensive house. You are not usually required to show any
further evidence of health to increase the cover on the
life assurance element of the endowment.
Another useful facility, which can generally be arranged
as part of the endowment, is a waiver of premium. This is
the option to have your premiums paid by the life office
in the event that you cannot work because of illness or
accident. It works very much like an income protection policy.
This does not come as standard with an endowment and costs
extra.
There are various different types of endowment, the main
types of which are summarised on the following pages.
