Endowment Mortgage
Endowment Mortgage
What action should I take about my Endowment Mortgage?
If you have received a projection letter from your insurance company indicating that there will be a shortfall on your endowment mortgage, you should consider the following:
Endowment Mortgage history
Endowment mortgage policies were sold by the bucketful in the 1980s and 1990s as an alternative option to a Repayment mortgage. An endowment mortgage is a life insurance savings policy which is designed to grow over a certain time scale (often 25 years) to pay off the amount borrowed to purchase a property. So in this respect the homeowner pays the interest on his/her mortgage and a monthly premium into the endowment mortgage savings plan.
Types of Endowment Mortgage
There a basically two types of endowment mortgage policy. A "full" endowment mortgage policy is where there is an underlying guarantee, that all of the mortgage amount will be paid off. In paying for this guarantee the monthly premiums are expensive which explains why the second type of endowment mortgage, the "low cost" endowment mortgage has been by far the most popular plan sold to millions of UK householders over the last 20 years. Both "full" and "low cost" endowment mortgage policies are linked to the stock-market. The problem with "low cost" endowment mortgages is that they do not guarantee to pay off the mortgage at policy maturity and they are dependent on positive stock-market returns to ensure that they do.
The majority of endowment mortgage policies taken out in the 1980s were "With Profit" plans linked indirectly to the stock-market. A With Profit low cost endowment mortgage consists of an underlying guarantee called the basic sum assured upon which the insurance company will pay annual bonuses dependent on the profits made by the insurance company through its With Profit fund. This With Profit fund is invested in stocks and shares, however the fund is managed to provide a "smoothed" return so that investors are protected from stock market volatility. In this respect the With Profit fund will keep back some of the profits during strong performing years to compensate investors in years where the returns may be poor. It is the combination of the basic sum assured and the bonuses accrued over the life of the endowment mortgage policy that in theory will add up to the sum required to pay off the mortgage. Over the last five years we have seen a dramatic fall in With Profit fund bonuses as global stock markets have declined in value, so much so that many insurance companies can no longer provide endowment mortgage policy holders the assurance that the final maturity payouts will cover their mortgage.
In the late 1980s insurance companies introduced "Unit Linked" endowment mortgage policies as an alternative to With Profits. These types of policies are directly linked to the stock market and therefore are more prone to fluctuation in value as there is a direct correlation with general stock market performance. As a result these policies have been harder hit by stock market falls in the last few years.