Stay in for 25 years, or lose out

Endowment mortgages combine an interest-only loan with a life policy whose premiums the named borrower has to pay every month, and whose proceeds are used to repay the specified sum on maturity, generally after 25 years, writes William Raynor.

The bulk of the monthly payment - perhaps pounds 400 out of pounds 460, for instance - covers interest on the loan, and the rest of the payment goes into the life policy whose premiums are invested in securities and equities. To achieve full repayment and, if possible, leave the borrower with a lump sum as well - as most endowments are said to do - this investment has to produce average returns higher throughout the period than effective rates of mortgage interest.

How many people have endowment mortgages? Hard to tell, precisely. But from less than 20 per cent in the early 1980s, endowments peaked in 1988 at 84 per cent of gross mortgage advances of pounds 67bn, and three years ago, according to the Council of Mortgage Lenders, accounted for 60 per cent of mortgages worth pounds 57bn. Now, endowments declared as such have fallen to a third of all new mortgages, although their actual share may be a bit higher.

Three kinds of endowment are sold: traditional "low cost with-profits", which guarantee the medium-term bonuses reflecting investment performance, flatten peaks and troughs and are probably the safest and most popular; "unitised with-profits", which express benefits in terms of the policy's current aggregate value; and "unit-linked", whose returns mirror changes in the market value of the units in which the premiums are invested. In each category, policies and charges vary from company to company.

Best buys? Because many people move or split up "before term", those endowments that are "low charge and high surrender value" are best. These, said the OFT's 1995 report, could "out-perform straight repayments on most scenarios" and, towards maturity on a pounds 50,000, 25-year mortgage, cost pounds 3,200 less than some with "high charges and low surrender". Best companies? For with-profits in particular, Equitable Life, Friends Provident, General Accident, Legal & General, Norwich Union, Scottish Provident, Scottish Widows and Standard Life.

Any other pluses? Not many, it seems. On average, at early surrender a fifth of the way through, compared with straight repayments, the OFT found they would cost an extra pounds 600. For those with lower incomes and other borrowings, extra costs of even a few pounds a week can prove critical.

Endowments are also less tax-efficient than interest-only mortgages backed by PEPs or pensions, because life funds lost relief on premiums in 1984 and are subject to both income tax and capital gains. Cuts in Miras (Mortgage Interest Relief at Source) to 15 per cent beneath a pounds 30,000 ceiling have reduced any advantage bestowed on endowments by rebates on amounts fixed until maturity.

Lower inflation since the 1980s has meant that, as the value of sums borrowed has eroded less rapidly, there has been more pressure on borrowers to repay their debts quickly instead of taking out endowments and waiting for a lump sum after 25 years.

To make the most of endowments, that is what you need to do. Hence, although they are often sold on flexibility, they actually lock you in. In theory, if you sell, you can keep the life policy going on its own or transfer the mortgage to your next property. In practice, like the OFT, you may find this process less expensive with straight repayments. And if you have a joint endowment mortgage and are separating, one of you has to sign over your rights on the joint-life policy, or it has to be surrendered completely. If you want to keep your mortgage comparatively simple and certain, an endowment is probably not your answer.

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Loren Hughes: Financial Accountant

£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

Sheridan Maine: Finance Analyst

Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

Sheridan Maine: Financial Accountant

£150 - £190 Daily Rate: Sheridan Maine: One of London's leading water supplier...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor