Endowment Mortgages

An endowment mortgage is a special type of interest-only mortgage, where monthly repayments go towards paying the interest charged on the loan amount, rather than repaying any of the amount borrowed. This means that, at the end of the mortgage term, you have not repaid any of the debt itself, so you must have another savings or investment scheme in place to repay this amount. In the case of an endowment mortgage, this investment plan is an 'endowment policy'.

An endowment policy is a type of stock market investment designed to increase in value over the term of the loan, so that when you come to pay off your mortgage your savings are equal to (or greater than) the amount borrowed. In addition, most endowments provide a form of life insurance which covers repayments if you die before paying off your mortgage.

These mortgages were especially popular during the nineteen eighties and nineties. Endowment salesmen were paid commission on each policy they sold, which led to them using 'hard-sell' techniques to promote this type of mortgage. Salesmen 'promised' that the investment would grow significantly, so that it not only paid off the mortgage, but provided you with a little extra cash to spend how you wish. However, in reality millions of endowment mortgages have already failed to cover the cost of the loan, or are not expected to grow sufficiently enough to cover the amount borrowed, which means than millions of mortgage holders have to find alternative financing to pay off their mortgage, despite having paid into an endowment mortgage for many years.

The problem with this type of mortgage is that the stock-market is too volatile to ensure adequate and assured growth of investments. Share prices have tended to increase in the past, but often their growth is too small to allow an endowment to reach the value of the loan by the end of the mortgage term. There are relatively few endowment mortgages sold today.

Mis-sold Endowments

If you believe your endowment policy was mis-sold, you may be able to make a claim for compensation. If you were not informed about the potential risk to your investment, that it may not cover your whole mortgage upon maturity, or that you could lose out financially if you cashed in the policy early, you could be entitled to compensation. Any compensation is calculated by comparing the performance of your mortgage with that of a repayment mortgage taken out at the same time. Because such a large number of people were affected by poorly performing endowment policies, the FSA set a time limit within which you can make a claim. You must make your claim within three years of receiving your first 'reprojection' letter, unless your mortgage provider is based in Scotland, where the limit is five years. You may wish to contact the Financial Services Authority (FSA) or your local Citizens Advice Bureau if you decide to make a complaint.

For further details about dealing with a shortfall see Making up a Shortfall.