Endowment Mortgage – Expert Broker Advice

Endowment Mortgages were hugely popular in the 1980s and 1990s and were often sold alongside interest only mortgages. There has been a lot of problems and scandals around endowment mortgages and failure for the borrower to repay the capital to the lender at the end of the agreement means customers can possibly face serious consequences and lose their home.

In this article we look into the history of endowment policies and if they are suitable for you.

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What is an endowment mortgage?

Endowment mortgage shortfall

Next steps



What is an endowment mortgage?

An endowment mortgage is an arrangement for the borrower to pay back the lender on an interest only basis and the capital is to be repaid by one or more endowment policies brought from an insurance company. Endowment policy are a type of savings plan where you pay into on a monthly basis and at maturity the proceeds will be intended to be used to pay off the capital loan on a mortgage and the possibility of a cash surplus for the borrower. This is funded by the savings a customer can make each month by paying interest only to the lender, compared to a normal capital repayment mortgage. A lump sum for the endowment policy is paid upon the end of its term or on the policyholder’s death, whichever is sooner, unless it is cashed in early. The borrower has two separate agreements, one with the lender for the mortgage and one with the insurance company for the endowment policy. Since they are separate agreements, the customer can make changes to either agreements as they wish.

There are different types of endowment policies to choose from and the most common types are with‐profits and unit‐linked.

With-profits policies are medium to long term investment funds, linked to the stock market and carries a guarantee to generate a certain amount if premium payments are paid. How with-profit policies work is that the customer’s premiums are pooled together and invested in the insurance company’s with-profits fund, managed by a professional investment manager, into different types of investments such as shares, bonds, property and cash. Annual bonuses are issued to the customer and added to their policy with a possibility of an additional terminal bonus at the end of the policy.

Non profit endowments are another type of endowment policy and pays a set amount on maturity. Premiums are usually lower than other policies which intend to make a profit and is sold with life insurance which can pay off a mortgage should a policy holder pass away before the end of term.

Unit-linked policies are tied directly to shares and carry higher risks for customers since there are no guarantees and the pay-out depends on the performance of underlying investments. Customer’s premiums are used to buy units offered by the provider and the policyholder can usually have a choice on which funds to invest in. The endowment policies’ value will depend on the current value of the units and how well the investments performed meaning the values can increase or decrease.

Whole of life endowment policies are sold alongside life insurance and is held for the rest of your life rather than a defined term. The idea is that it will pay off a lump sum or your mortgage should you pass away before your mortgage is paid off.

Endowment mortgage shortfall

Issues arise from endowment policies sold between 1980s and 1990s because many of the policies didn’t generate the lump sum predicted and created a shortfall for customers between the amount the endowment generated and capital owed on their mortgage.

Although most understood that there was no absolute guarantee of mortgages being repaid by endowment policies, many felt misled and been inappropriately mis-sold the product leading to a huge wave of claims and compensation made for the customers.

It is advisable for customers to check their projections with their provider to see if their policies are on track or expected to have a shortfall. If a customer is unsure that they will be able to use their endowment policy pay-out to cover the initial mortgage loan then it is advisable for them to switch partly or wholly from interest only to a capital repayment mortgage. It is wise to check early and get organised in case the capital mortgage loan needs to be repaid with other investments or savings.

Next steps

With the rise of other schemes such as ISAs which are much more tax efficient, endowment policies are now not as popular as before although they still exist. Following the highly publicised scandals surrounding endowment policies, complaints from customers and compensation claims due to mis-selling, the industry is much more careful about the sale of endowment policies and risk warnings are outlined a lot clearer for customers are per laws and regulations. Please do not hesitate to contact us if you would like any further advice.

FAQs- Endowment Mortgage

What is an endowment mortgage?

An endowment mortgage is a form of home loan where the borrower uses the proceeds from the sale of an investment (such as a unit trust) to fund part or all of the purchase price of their new property.

The mortgage is secured against the borrower’s investment and provides protection for lenders in the event that the underlying asset does not perform as anticipated.

The lender receives regular income payments over the lifetime of the loan. These payments may be either fixed or variable depending on the terms of the contract. If you are interested in an endowment mortgage you can contact a financial adviser for a suitable mortgage deal.

How does an endowment mortgage work?

When purchasing a house, it is common practice to borrow some or all of the money needed to finance the purchase. This is done through a mortgage arrangement. In this type of transaction, the seller transfers ownership of the property to the buyer in exchange for a down payment and a mortgage agreement. The mortgage agreement is used to secure the remaining balance of the purchase price.

In an endowment mortgage, the purchaser agrees to make regular payments into a special account known as an endowment policy. The purpose of these payments is to provide the lender with the funds necessary to repay the mortgage at the agreed time. Once the mortgage has been paid off, the endowment policy continues to produce income until maturity. At this point, the entire amount of the original endowment policy is transferred back to the purchaser.

Who can buy an endowment mortgage?

Anyone who wants to own a home can apply for an endowment mortgage. However, there are certain conditions that must be met:

You need to be 18 years old or older

Your income should exceed £40,000 per year

You cannot already own your current residence

If you meet these criteria, you can apply for an endowments mortgage.

Can I afford an endowment mortgage?

Yes, you can afford an endowment mortgage. You just need to ensure that you have enough money set aside to pay off the mortgage when it comes due. It is important to remember that you will only receive the full value of the endowment policy once the mortgage has been repaid. Therefore, you will need to save up for several years to cover the repayment period.

How can I deal with an endowment shortfall? 

There are two options available to deal with an endowment shortage. The first option is to increase the size of the endowment policy. The second option is to sell the endowment policy. Both of these options require professional assistance. We recommend that you should contact for a piece of legal advice from mortgage advisers at NeedingAdvice.co.uk ltd.

What is the major advantage for endowment mortgages? 

An endowment mortgage allows you to benefit from the growth potential of your savings without having to worry about making monthly mortgage payments. As long as you continue to make regular contributions to your endowment policy, you will always receive the same level of income.

Can I get an endowment mortgage with a bad credit history? 

Yes, you can still qualify for an endowment mortgage even if you have had problems repaying debts in the past. There are endowment provider lenders who offer loans to people with poor credit histories. They do so by offering flexible interest rates and other benefits. To find out more information on how they work, visit www.NeedingAdvice.co.uk.

How do you pay off an endowment mortgage?

The process of paying off an endowment mortgage is very similar to that of any other loan. You will need to start making regular payments towards the principal each month. These payments will reduce the outstanding balance of the mortgage term. Once the mortgage has completely cleared, you will receive the entire amount of the endowment policy back. This means that you will no longer need to make further payments.

What happens if I die before my endowment mortgage is fully repaid? 

When you die, all of the money that was contributed towards the purchase of the endowment mortgage goes towards the payment of your estate. If you died before the mortgage was completed, then your family would not receive anything. However, if you were able to complete the mortgage before you passed away, then your beneficiaries would be entitled to receive the remaining funds. You can read about inherited mortgages on our website.

What is the minimum age requirement for an endowment mortgage? 

You must be 18 or older to apply for an endowment mortgage. In order to qualify for this type of mortgage, you must also have sufficient assets to secure the loan.

Is there a maximum age limit for an endowment mortgage application? 

No, there is no upper age limit for applying for an endowment mortgage provided that you meet the eligibility criteria.

Do I need to provide proof of income to apply for an endowments mortgage? 

No, you do not need to provide proof of your income when you apply for an endowment policy. However, we recommend that you keep track of your earnings throughout the year. This way, you will be able to show us evidence of your current financial circumstances.

What is the difference between an annuity and an endowment mortgage?

Both types of policies allow you to save for retirement. The main difference is that an annuity pays a fixed amount every month, while an endowment mortgage allows you access to the full value of your investment at any time.