An endowment mortgage is effectively an interest
only mortgage with an additional savings plan in the form
of an endowment policy. Monthly contributions are made to
a Life Insurance Company who invest your money in the savings
plan.
Life insurance is built in to the savings plan
so your mortgage
is repayed if you die before the endowment policy reaches
maturity.
Endowment policies typically take two forms; 'with-profits'
and 'unit-linked'. A 'with profits endowment' has two bonuses;
a reversionary bonus and a terminal bonus.
The reversionary bonus is paid each year and is guaranteed
if the policy is maintained until its maturity date. The
terminal bonus is paid on maturity of the policy and is
dependant on the performance of the underlying fund. The
value of a unit-linked policy is determined by the value
of the underlying investment at the maturity date. The value
of units on a unit-linked policy can go down as well as
up.
Advantages If the investment growth rate exceeds those
estimated at outset you may be able to pay off your mortgage
early or enjoy a lump sum at the end of the repayment period,
in addition to paying off your mortgage. The life insurance
cover can be cheaper than if purchased on its own. The mortgage
can be transferred to another property.
Disadvantages Endowment plan charges are relatively high.
You have no guarantee that you will have sufficient funds
to pay off the mortgage at the end of the repayment period,
as the investment could perform below that assumed at the
start. (By monitoring your investment's performance you
could make additional contributions during the repayment
period if you felt the fund was under performing.)
Endowment plans are less flexible than other types of investments,
with most plans not allowing you to stop and start premiums.
Some plans charge penalties if you stop paying premiums
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