Best choice for Financial and Cryptocurrency News

- Advertisement -

- Advertisement -

What Is an Endowment Mortgage?

If you are currently shopping around for a mortgage you may not even have come across the term endowment mortgage. Whilst this arrangement will never be as popular as a simple repayment mortgage it is worth considering as it may suit your individual requirements.

For this type of mortgage loan, the borrower has two separate financial agreements. The first is with the lender of the mortgage and the second is with the insurer of the endowment policy or policies.

An endowment policy is otherwise known as a life insurance contract to be taken out for a specified term that is fixed, most often 25 years for a given amount of money. Yearly, you will be paying the policy premiums which in turn gather interest. At the end of the 25 year term for example, as the policyholder is still alive you will receive the amount of the policy including all bonuses aside from the final bonus. However, if you die prior to the end of the term, your estate receives all amounts as mentioned in your behalf. You are lucky in cases where over a period of financial prosperity, the total amount can reach twice more than the original policy amount. That is why in the past, an endowment policy was considered as additional security by the lender.

In an endowment mortgage, the borrower only pays the interest on the capital sum in contrast to the repayment loan. And because of this, the borrower is able to save money but makes payments to an endowment policy instead. The presumption is that the investment made through the endowment policy is enough to repay the mortgage at the end of the term aside from possibly creating more cash flow.

The only problem that might arise is when a country is in economic crisis. When the country is not in a period of prosperity, the bonus paid on the insurance policy is expected to be lower than estimated and the total amount paid by the policy is not enough to pay off the mortgage. There is still an additional reason though why still some favor an endowment mortgage and this is due to the fact that many lenders charge their interest annually. This means that any capital repaid monthly is not removed from the outstanding loan until the end of the year. As a result, the true rate of interest charged increases. In situations like these, endowment payments might only benefit from growth from the time it is invested. The required net investment return for the endowment for loan pay off would be lower than the average interest rate of mortgage over the same period of time.

In conclusion it is good to know that such an arrangement can be put in place and for specific advice you can speak to an independent financial advisor who can offer further impartial advice.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. AcceptRead More