What You Need to Know About a Mortgage Endowment Policy

A mortgage endowment policy is a complicated bit of finance that combines investment growth and life insurance. Most popular in the 80s and 90s, they were commonly used as a way to pay off your mortgage. However, in 2004 it was predicted that out of 8 million endowments, over 6 million of them would not meet the full cost of the person's mortgage.

The idea of a mortgage endowment policy means you get to borrow capital, while only repaying the interest. Meanwhile, the endowment grows and when the loan period is up you have a nice lump sum with which to pay the full outstanding balance. Your monthly premiums are a mixture of policy premiums and interest. You also pay for life insurance; this means if you die before the loan agreement ends your debt is covered. However, there is never a guarantee the endowment policy will cover the full cost of your mortgage.

One in three endowment mortgages reach maturity and are not enough to cover the balance of the person's mortgage. This is known as a shortfall and is bad news for the lender who then has to find the money from elsewhere to pay the debt. Before even considering buying a mortgage endowment policy it is important you seek independent financial advice. This will enable you to make an informed decision.

Financial institution The Prudential runs a traffic light system when it comes to their endowment policy holders. A green light means your policy is on course to meet the correct amount. An amber light indicates a significant risk your policy will not meet the right amount. And a red light means there is a very high risk your policy will not meet the amount needed to cover your mortgage debt. This allows you to top up your monthly payments and help close the gap.

The Prudential also sends its endowment policy customers an annual review letter keeping them up to speed on the financial year. Standard life and Norwich Union have both experienced an increased number of customers with shortfalls. Standard life reported that as many as 97% of their endowment policy customers were currently not going to meet their mortgage debt. No one bank or financial institution is benefiting from the mortgage endowment policy uncertainty. And all are desperately trying to improve circumstances for their customers

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