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What is an Endowment Mortgage?
With this type of mortgage the repayments to the lender consist purely of interest and no capital reduction is made to the loan. The amount borrowed therefore remains constant over the agreed term.
An endowment mortgage is linked to a With Profits or Unit Linked endowment assurance policy, with the eventual accumulated sum used to repay the loan, although this is not guaranteed. The endowment policy also provides a life cover benefit to repay the loan in the event of death. Tax is paid within the fund but the proceeds are tax-free on maturity.
Endowment contracts are generally written over a 25-year term, however, depending on affordability and circumstances, this can be shortened. You need to maintain the policy for the full term to achieve full benefit and for this reason it is portable from one mortgage loan to another. If increased borrowings are taken, possibly as a result of a subsequent house move, a top up would be required to cover the amount of the new loan. |
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With Profit
With Profit Endowment policies provide low risk capital growth, by the addition of annual bonuses plus a terminal bonus. The bonus rates are declared in advance and added to your investment. A terminal bonus may be paid out on maturity or early death or encashment after a qualifying period.These bonuses aim to smooth out the 'highs' and 'lows' of direct equity investment and are reviewed annually. Bonuses are not guaranteed and may and fall as well as rise depending on the long-term investment performance of the fund, the financial reserves of the company and expenses within the fund. |
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Unit Linked
Unit Linked Endowments provide equity-based investment through a range of investment funds offered by the Life Company, with different risk/reward profiles. You may switch between funds at little or no cost or invest in a 'managed fund'. This is a lower risk fund managed by professionals to provide steady capital growth. Your capital is not guaranteed and may fall as well as rise.Early surrender values are higher than With Profit policies but may still be lower than your contributions in the early years. |
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What are the advantages?
- If investment returns are good the endowment policy may grow to the amount of the loan within the agreed term, allowing you to repay the mortgage early.
- The possibility of a tax free lump sum when the endowment policy matures.
- Optional Benefits provided at little cost such as waiver of premium or critical illness cover.
- Waiver of Premium Cover means the life office would pay your premiums if you were unable to work for a limited period.
- Critical Illness Cover means the life office would pay out the full sum assured if you suffered certain serious illnesses defined within the policy.
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What are the disadvantages?
- If you cancel the policy early you may get back less than you paid in, as early surrender values may be nil in the first few years and very low thereafter, to reflect charges and administration expenses.
- If investment returns are poor your mortgage may not be repaid in full.
- The maturity benefits are not guaranteed.
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Mortgage Code Compliance Board
and the
Personal Investment Authority. |
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