Endowment Mortgages

An endowment mortgage is made up of two parts:

- an interest-only mortgage, where the monthly payments to the lender cover only the interest on the loan,

- an endowment policy, ie. a savings scheme, where money is invested in the stock market over the same term as the loan, to build up a lump sum that is intended to repay the loan at maturity. The policy also provides life cover.

Sales of endowment mortgages reached their peak in 1988, when they accounted for more than 80% of all new mortgages.

At the time, endowment mortgages were widely regarded as a good alternative to repayment mortgages. They enabled customers to gain maximum advantage from tax relief on their mortgage interest payments (MIRAS) and market conditions meant that the endowment policies generated high real returns. Lower interest rates also provided particular benefits for holders of endowments and interest only mortgages.

However, sales of endowment mortgages fell steadily through the 1990s as tax relief was gradually withdrawn and projected investment returns were adjusted to reflect a low inflation economy.

The result of the changing economic climate has been that a significant number of people with endowments bought to support a mortgage are now expecting a shortfall between the target sum required and the sum expected from the endowment policy.

In the light of these developments, the ABI established a Code of Practice for its members under which new re-projection letters must be sent to each customer at regular intervals (at least once every two years).