As the name itself suggests an endowment mortgage is one in which an endowment policy is taken out with the mortgage so that when the endowment policy matures, the outstanding mortgage amount can be repaid. Such types of mortgages are interest only mortgages which means that the mortgagor has to pay only the interest towards the mortgage. The principal is paid when the endowment policy matures.

• These mortgages were common in the U.K before 1984 since the interest paid on the insurance was tax exempt. However in 1984, this privilege was abolished but still saw a steady growth in such policies even after consumers were denied the tax break. The anticipated growth rate for endowment policies was high and some expected a 7 to 12% growth per annum.
• The problem with such mortgages arose when the insurers feared regulatory action and the anticipated growth rate dropped to a mere 4%. This drop in the anticipated rate made such types of mortgages financially unfeasible. Furthermore, mortgage interest relief at source (MIRAS) where the mortgagor received a tax break was a more feasible option. By the end of 2001 endowment mortgages were almost redundant.
• There were many other drawbacks associated with these types of mortgages which made them a awful financial product. Regulations were imposed on endowment holders to show the predicted maturity amount of the endowment. This in turn led to bad selling and mis-selling practices which further worsened the problem with such products. Action was taken against brokers and insurers who deceived unsuspecting consumers and approximately £2.2 billion were given as compensation by the insurers.
• Even if some endowment mortgages have done well in the past, they failed to show promise at the end of the last decade. Since the endowment element is connected to stock market investments, people have ended up paying more and more towards their policies as stock markets crashed and saw volatile changes in the recent years. Ultimately if the endowment doesn’t do well, then the mortgagor may face an inevitable foreclosure.
• Many experts now believe that endowment mortgages are not a good option in light of the housing bubble and the recession. Since many endowment policies are linked to stock markets and their performance, any downturn in the market can give a double whammy which would harm the mortgage as well as the endowment policy. Therefore it is advisable to look for other options such as repayment mortgages which are comparatively steady in nature.

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