Is your Mortgage Well Endowed?
An endowment mortgage is a form of interest-only mortgage. Instead of paying off a certain amount each month and gradually whittling down your debt, it means you only pay the interest on your mortgage, so you need to pay off the capital at the end of the term through a savings plan.
One way to do this is to take out an endowment policy, or a savings plan linked to the stock market, into which you pay a monthly sum. The idea is that this will accumulate a large enough sum to pay off your mortgage capital at the end of the term.
Unfortunately, due to the precarious nature of the stock market, endowment mortgages are classed as high-risk, and can lead to homeowners facing a large shortfall which they would then have to find the money from elsewhere.
Another option for an interest-only mortgage is an ISA which is a tax efficient savings account. This could be cash based or investment based. Paying money into an ISA every month aims to grow the fund to an amount to cover your final mortgage payment – but youd have to resist the temptation to dip in to it in an emergency.
If all this sounds a little too risky for you…it probably is. Thousands of these types of mortgages were taken out in the 80s and 90s, and most homeowners now are facing up to the fact that the stock market just isnt performing well enough for them.
At the end of the day, if youre looking at different mortgages, and you don’t like risk youre best considering a repayment option. These work just like a loan does, each month your payment is made up of both interest and capital and guarantees to pay off the mortgage at the end of the term as long as you maintain your payments. But its the safest way to buy your dream house.