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What is an endowment mortgage?
An endowment mortgage policy is a long-term investment linked to life insurance.
You agree a monthly payment for between 10 to 25 years, after which the policy expires and releases a lump sum, which you can then use at your discretion, or to pay off your mortgage.
If you are using an endowment policy to pay off a mortgage, this will be taken out alongside an interest-only mortgage, paying it off the balance when the endowment matures.
How does an endowment policy work?
A portion of the policy premium will be paid towards the life insurance, for which you can choose a beneficiary if you die before the policy expires.
The money you pay into the policy is invested in stocks and shares by the endowment provider. The performance of the shares perform over the policy term will impact on the amount you receive as a lump sum at the end.
Can you still buy an endowment mortgage?
Nowadays, you can only usually buy an endowment as an investment plan.
While they used to be sold alongside mortgages, many of these endowment mortgage policies were mis-sold, leading to consumers not understanding the risks associated with a lower than expected payout.
Once maturity was reached, many endowment mortgage policies failed to cover the mortgage balance. They also offered tax relief which is no longer applicable.
Companies who offer endowment policies are typically either:
- Life assurance/insurance providers.
- Friendly societies offering saving and children's accounts.
- You can also buy a second-hand endowment policy on the Traded Endowment Policies (TEP) market.
- If you buy an endowment policy via a financial adviser this means you can benefit from impartial advice in choosing a policy that is suited to your finances and risk appetite. They can also suggest investment alternative.
What if I have an endowment policy?
If you currently have an endowment policy, you have a few options:
- Continue to pay into your plan until maturity and receive a lump sum at the end of the term.
- Some providers will permit you to stop making payments and allow your endowment to mature with a reduced payout.
- You could cancel your policy and receive a smaller payout.
- You may be able to sell your endowment to a third party.
There are a few types of endowment policy:
Non profit policies are designed to pay a specific amount when they mature. These policies have lower premiums than those permitting you to make a profit and include life insurance.
With profit endowment policies are designed to pay an agreed lump sum with additional profit on top, assuming the investments have performed well.
Unit linked endowment policies use your premiums to buy units in investment funds, which you can select and change during the term.
Whole of life endowment policies include life insurance for the rest of our life, and pay out a lump sum to pay off your mortgage if you die before paying it off.
What is an endowment bonus?
There are a few types of endowment bonus that may be payable depending on your policy:
- Terminal bonuses are paid upon maturity, although, are only payable if the investments perform.
- Some policies include annual bonuses assuming investments perform well.
- Special bonuses may be payable in some situations, for example, if a friendly society becomes a public company.
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