Endowment Mortgages

Endowment mortgages are mortgages that have an interest-only structure. This means that your monthly payment only applies towards the interest portion of your mortgages, not the capital. In order to pay the capital, you will need some other form of investment.

With endowment mortgages that investment is an endowment policy. These are stock market investments that work alongside your mortgage to earn the money for the capital. In theory, the money in the endowment policy will grow through the life of the loan, and you will have enough money to pay back the capital when you are at the end of the mortgage term.

The Popularity of Endowment Mortgages

In the 80s and 90s endowment mortgages were extremely popular with borrowers. Because the economy was strong, most borrowers felt that the investment returns would be excellent and be more than enough to pay down the debt, with many pounds left over at the end of the mortgage. However, this did not work well at all.

The problem is that endowment mortgages do not factor in the unpredictable nature of stocks. When the economy started suffering, the growth in the endowments suffered. Many homeowners were left with huge capital balances they owed at the end of the mortgage term. This created an endowment shortfall that homeowners had to pay.

If you choose to use an endowment mortgage anyway, or if you are already in one, you can make up this shortfall by paying more into your policy than required each month. You could also create a new investment to cover the gap. Most homeowners, however, choose to convert their endowment mortgages to repayment mortgages.

Mis-Selling Claims

You are also allowed to lodge a mis-selling claim if you feel that your lender mis-sold you an endowment mortgage. This is only allowed if the lender did not explain the problem created by poor investments, you did not completely understand the risks, or you were sold a mortgage that would come to maturity after retirement. Other grounds for the claim include improperly advising you to cut your existing policy, not checking to make sure you can afford the payments, and not explaining clearly the potential for loss if you leave the mortgage early. If you make this claim successfully, you will be repaid some of the money you are now short on the mortgage agreement.

Endowment mortgages seemed like a good structure when the economy was strong. Unfortunately, many homeowners purchased this type of mortgage, and then the economy turned sour. If you are stuck in a bad endowment mortgage, consider restructuring your mortgage or filing a mis-sold claim.