Repaying Your Mortgage With An Endowment Policy.

Summary
An article looking at the two different ways to repay your mortgage. With the current ‘credit crunch' many are opting for the interest only option but will your savings grow enough to pay off the capital?

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With a repayment mortgage you not only pay back the interest on the loan but you also pay back the capital (the original amount borrowed).You usually pay this back monthly over the lifetime of the mortgage. Borrowers are safe with the knowledge that at the end of their mortgage, which is normally between 20 and 25 years, the mortgage will be paid off in full.

An interest only mortgage is different as with this type you pay two individual payments each month. The first payment is made to the mortgage lender and is for the interest part of the loan. The second payment is to a separate account or savings scheme which is intended to grow into a sum to pay off the original amount borrowed at the end of the mortgage period. Many of us will have heard of endowment policies from all the media coverage, these are what were used for paying off the capital part of mortgage and they were very popular.

For a long time, many people took out interest-only mortgages that were linked to endowment policies In the 1980s and 1990s millions of endowment mortgages were sold.

However, the major problem with endowment mortgages is that there is no guarantee your endowment policy will grow enough to pay off the capital at the end of your mortgage term. Therefore, with an endowment mortgage you are taking a much bigger risk then you are with a repayment mortgage.

The reason endowments are classed as 'risky' products, is because they are investments relating to the performance of the very unstable stock market. There is always the possibility that if the stock market does not grow enough, your investment might not become big enough to pay off the total amount of your mortgage. On the other hand, which would be where the gamble of taking the risk paid off, if the stock market does well over a long period of time, there is a possibility the endowment will pay out more than the target amount. This would leave you with a settled mortgage and some cash in hand.

With the current market been so unstable there are many endowment mortgages that are expected to fall short of the amount they need to pay off the mortgage.

Today, there are approximately around 10 million endowment policies linked to mortgages in operation. This means that about eight million people are affected. These numbers are differing as some people have more than one endowment policy running to pay off their mortgage.

We also know that many more borrowers than this have bought endowment policies over the years but have since cashed them in. It is difficult to estimate how many.