Endowment Mortgage

With an endowment mortgage the original loan remains outstanding for the full 25-year mortgage term.

The money that would have been used to repay the capital would have been used to repay the capital is instead invested in an endowment policy. This money is used to buy stocks and shares.

The hope is that in 25 years time the value of the endowment policy will have increased to a level where it can be used to repay the original loan and possibly provide a surplus cash amount.

Endowment Mortgage Advantages

An endowment mortgage gives the borrower a chance of receiving a cash sum over and above the sum necessary to repay their mortgage at the end of the term.
The repayment date for an endowment mortgage is fixed no matter how many times you move house again in the future. If you do move again, you simply carry on paying the endowment premiums and take out a new mortgage for the sum required to purchase your next home. Any additional mortgage money required could be borrowed on either a repayment basis or an endowment basis and repaid over whatever term is convenient.
An endowment policy includes a life assurance policy as well as a savings plan.

More than 100 life assurance companies compete to offer endowment policy products in the UK market and their performance varies greatly.

An endowment policy is dependent on stock market returns and have come in for a lot of criticism in recent years.

Risk-to-Reward Ratio Endowment Policy

The most conservative form of endowment policy are those with low risk and low reward, for example, awith-profits endowment policy.

Your monthly premiums are pooled with the funds of all the other investors. At the end of each year, the life company will allocate bonuses to all the investors (depending on the investment performance). Once awarded, these annual bonuses can't be taken away.
At the end of the term (when the endowment mortgage is to be repaid) the life company will pay a one-off terminal bonus. The terminal bonus may represent a large proportion of your final payout but it isn't guaranteed.

Unit-linked endowment policies are higher risk but are projected to earn a higher return.

Your premiums buy specific units in stock market linked investments. The value of these units (like the stock market) can go up or down on a daily basis.
Unit-linked funds have the potential for greater and faster growth than with-profits policies (possibly leaving you with a tax-free lump sum, or maybe the chance to pay off your mortgage early). However, there is also a risk that the unit-linked endowment policy may not produce such a good return as a with-profits policy.

The highest risk endowment policy is that which invests in areas such as small companies or emerging markets. In a good year performance can be spectacular but in a bad year losses could be huge or even total.

No one knows how the stock market will perform over the next 25 years. Before you can decide whether it is the best type of mortgage for you, take advice from a suitably qualified professional.