Endowment Mortgages UK – What Are They?
Interest only mortgages
Buying a house is the most expensive purchase you will ever make in your life. In the UK we are a nation of house buyers. In other countries they are quite happy renting property. Here, it’s our great history of land-owning that we can thank for the biggest millstone most of us carry for decades!
There are many different types of mortgage than can be used to pay for a property and like most things they are subject to fashion. The endowment mortgage is one such product that has fallen out of favour and become unfashionable, why?
The only way is up
An endowment mortgage is basically a product that allows you to pay just the interest each month on the loan that you have taken out to buy your property. When you take out the loan, typically for a twenty five year period, you also take out a life assurance policy with which to pay off the loan in twenty five years.
Two birds with one stone
This was a great way to combine the protection that the mortgage company wanted so as to safe guard their money in case you dropped dead within the twenty five year period and a way for you to save to pay off the debt. There was a time when not only would the endowment pay off the mortgage, but the markets were performing so well you would also get a nice cash bonus at the end of the twenty five years.
In the nineteen eighties the stock market was incredibly buoyant. Inflation was fluctuating around about 7-10% but the economy was healthy enough to cope with it and it was a boom time. Margaret Thatcher was Prime minister and Nigel Lawson was her Chancellor. Between them they stocked the housing market so much that the bubble eventually burst.
The economy had been swinging from boom to bust for decades, in other words going through massive growth then plunging into recession with job losses and high unemployment. Then after a few years it would crawl out again only to head remorselessly towards the next boom period. The eighties were the boom and the nineties were when it all went bust.
Another way out
Endowment plans could only pay out healthy sums at the end of their twenty five year periods if the funds into which they had been invested had performed well. This in turn meant that the financial Services Company that supplied the endowment to you could pay out good terminal bonuses on the plan. These are the bonuses that are applied to the funds when they mature. In the eighties there had been no problem. Terminal bonuses were huge. People were seeing cash sums of £30,000 appearing from nowhere once they had paid off their £100,000 mortgage.
Then it all started to go wrong.
The recession of the 1990’s saw the markets collapse. Economic growth through the New Labour Government of this millennium continues to be what they call “steady” and the markets are regarded as “slow”, with several blips of potentially disastrous crashes almost materialising on the screens of the money men in the City and then vanishing again.
Endowments now are unlikely to pay out enough to even cover the amount of the loan in the first place. This has led to what is known as the “Endowment crisis” with thousands of people facing potential shortfalls in finance when their mortgage loans become due.
Once upon a time
The mortgage market has gone back to promoting repayment mortgages. These are mortgages where you pay off some of the capital each month as well as the interest.
Those who have endowments in place have been warned of the shortfall and will have to find alternative ways to fund the deficit. Due to the nature of the markets, however, any shortfalls can only be estimates. It will only take a few years of growth and a buoyant economy and things will revert to the way they were.
Maybe then endowment mortgages will become popular again. They were good while they lasted.