The Truth About Endowment Loans

The Truth About Endowment Loans
Chances are you've heard of​ an​ endowment mortgage,​ but you're not quite sure what it​ is​ .​
Nowadays this unique type of​ mortgage is​ in​ the​ news everywhere and is​ receiving a​ bad rap from many people .​
So what's the​ truth about an​ endowment mortgage,​ and how does it​ really work?
Endowment mortgages can be somewhat complex,​ although the​ system behind them is​ simple .​
They work in​ two parts .​
On one hand,​ they are a​ simple interest-only mortgage,​ and are treated as​ such .​
The borrower pays interest on​ the​ mortgage to​ his lender,​ and any terms that can apply to​ a​ normal mortgage are applied to​ these interest payments,​ including capped rates,​ fixed rates,​ variable rates,​ and any other special incentives the​ lender may offer .​
However,​ the​ borrower is​ not paying off his mortgage with these payments,​ as​ he would be with a​ typical mortgage: He is​ only paying the​ interest.
The mortgage itself is​ paid separately,​ and only at​ the​ time it​ ends .​
During the​ term of​ the​ loan,​ the​ borrower makes separate payments into an​ endowment fund .​
This fund is​ invested in​ stocks,​ shares,​ and life insurance,​ and allowed to​ mature throughout the​ term of​ the​ mortgage .​
At the​ close of​ the​ mortgage term,​ the​ endowment is​ cashed in​ to​ pay off the​ mortgage.
the​ downside here is​ obvious: If the​ endowment investments don't do well,​ then the​ endowment will not pay off the​ total balance,​ and the​ homeowner will still be responsible .​
Today's extremely low interest rates and sluggish stock market have turned some people away from the​ idea of​ endowment mortgages .​
However,​ there are advantages to​ this unusual type of​ plan .​
Throughout the​ years of​ your mortgage,​ your monthly payments remain low (only the​ cost of​ interest) and will not be a​ strain in​ your income .​
The money you​ set aside for your endowment is,​ essentially,​ working for you; regardless of​ how well the​ market performs,​ chances are good that you​ will get back more than you​ paid in​ .​
Also,​ lenders that offer endowment mortgages offer borrowers a​ few escape clauses .​
If your endowment is​ in​ progress,​ and the​ stock market is​ doing poorly,​ you​ may be given the​ option to​ opt out of​ your endowment and invest your money instead in​ an​ additional savings plan which accrues interest on​ your payments .​
It won't gain you​ as​ much as​ an​ endowment potentially could,​ but it​ will protect you​ against poor investment performance.
Most lenders will also allow you​ to​ switch your entire mortgage,​ or​ just the​ amount of​ the​ projected shortfall,​ to​ a​ standard repayment mortgage.
For the​ financially organized,​ endowment funds can be a​ great way to​ pay your way through owning a​ home and come out clean on​ the​ other side .​
With an​ endowment mortgage,​ just as​ with any other investment,​ it​ pays to​ keep a​ close eye on​ your cash.

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