We love answering all of your personal finance questions, but there are a few that throw us for a loop every once in a while. We have gotten in a few questions about an endowment mortgage, and we figured that we’d answer those for you.
You see, an endowment mortgage is basically where you would pay interest only on the mortgage, while making separate payments to an endowment policy. In theory, the policy will give you the ability to pay off the principal on the mortgage, and even give you a little surplus that you can enjoy on your own. If you pass away before the mortgage is done, the policy automatically pays out as if it had matured fully. So you have two different contracts — one with an insurance company (the endowment policy) and one with the mortgage lender. The insurance company will give you a preprojection letter. This letter is incredibly important, because it shows how much ought to be in the endowment when it comes full term. You have to then take that letter and work out terms with a lender for the interest only loan. You use the letter to justify the mortgage’s existence.
The thing about an endowment mortgage is that it’s always shifting around. If interest rates don’t do what they need to, the endowment will be short. This means that you have to pay more into the endowment so that you will have enough money when the time comes around to pay it off.
If interest rates really go sky high, then you can get the surplus. It’s yours after you’ve made sure that the mortgage has been paid off in full. You might have bonuses throughout the course of the mortgage because the fund performed better than what was projected.
Interest only loans aren’t for the faint of heart — even though they tend to be a lot less money every single month, you really need to make sure that you’re getting those payments in a timely manner. Failure to do so will lead to serious problems, including the loss of the home and forfeiture of all of the payments made thus far.
With any instrument that’s based on market performance on some level, you want to make sure that you know how that performance will be derived. Dig into the endowment mortgage offer as much as possible. Ask about any fees that are involved. You want to get a full breakdown of what’s really owed at every step of the way so that there are no surprises. The last thing that you and your family need to worry about is whether or not you’ll have a home from month to month.
The time really is right to look into all of this information. Why not start today, while it’s all still on your mind?
