Personal Finance: Endowments in the doghouse

Mortgages: as property price rises slow and special offers proliferate, we show how to choose a deal that meets your priorities - be it
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The Independent Online
ONCE upon a time, there was a simple choice to make when buying a house. On the one hand there was the conventional repayment mortgage, paying a bit of capital and interest with each monthly payment.

Alternatively, you could take out an endowment mortgage, where you just paid interest on the loan and used the proceeds of an endowment - a with- profit life assurance policy - to pay off the capital at maturity.

Both had variable interest rates that moved up and down as lender rates changed.

Now it is much more complicated. Almost half of homebuyers choose a repayment deal, but are then faced with a choice of interest rates, including fixed- rates, discounted and capped deals. Only three out of 10 new mortgages are now endowment-backed.

Buyers are also shunning PEP mortgages, which allow you to pay interest on the loan and save for the capital repayment through a stock market investment."I can't remember the last time someone took out a PEP mortgage," said Siobhan Hotten, at John Charcol, independent mortgage advisers .

Repayment mortgages are popular because they are straightforward. After 25 years, your debt will be paid off.

Most of these loans are also "portable" so you can take the loan with you when moving house- although it is possible to start a new 25-year loan when you move house. Some people do this to keep their repayments down, but it does extend the term of your loan.

Many lenders, including Bank of Scotland, Legal & General and Sainsbury's, now offer flexible repayment mortgages that let you pay in lump sums or extra money each month to reduce the debt. You can cut several years and many thousands of pounds off your mortgage this way.

Be aware that a few lenders will only issue repayment mortgages for one property, so you cannot take the deal with you if you move. Mortgage Trust is one such lender. Check the small print carefully.

Interest-only mortgages can be transferred when you move, but an endowment policy may not provide enough money to pay off the capital at the end of the loan. Ms Hotten believes there is still a case for endowments: "The contracts are much better now. They provide valuable life cover and are quite often packaged with critical illness cover, protecting you if you are unable to work."

Contact: John Charcol, 0800 718191.