An endowment mortgage is a type of interest-only mortgage that was popular in the UK during the 1980s and 1990s. With this arrangement, you pay interest-only monthly payments to the mortgage lender, and simultaneously pay into a separate endowment policy (a type of savings and investment plan with life insurance). The idea is that the endowment policy grows over the mortgage term and produces a lump sum sufficient to repay the mortgage at the end.
Endowment mortgages fell out of favour after it became clear that many endowment policies were not growing quickly enough to repay the associated mortgages, leaving millions of borrowers with a shortfall. This led to widespread mis-selling complaints and the FCA requiring providers to send regular "re-projection" letters warning policyholders of potential shortfalls.
New endowment mortgages are no longer commonly available, but many existing policies are still running. If you have an endowment mortgage, it is important to review the projected maturity value against your outstanding mortgage balance and take action if there is a shortfall — options include increasing contributions, extending the term, or switching part of the mortgage to a repayment basis.
In 1995, you took out a £100,000 interest-only mortgage over 25 years and an endowment policy costing £180/month alongside it. The policy was projected to pay out £120,000 at maturity. However, lower-than-expected investment returns mean the projected payout is now only £75,000, leaving a £25,000 shortfall that must be addressed before the mortgage term ends in 2020.
Key Points
- An interest-only mortgage paired with an endowment investment policy
- The endowment policy was meant to repay the mortgage at term end
- Widely sold in the 1980s and 1990s but now largely obsolete
- Many policies failed to produce enough to repay the mortgage
- If you have one, check for projected shortfalls and plan accordingly