The general mortgage market is divided into two main types of mortgages: repayment mortgages and interest only mortgages. With a repayment mortgage, your monthly mortgage payments cover both the interest and principal of your loan. Thus, at the end of your mortgage term, normally 25 years, you will have repaid the entirety of your mortgage and you will be the outright owner of the property.
With an interest only mortgage, your monthly mortgage payments only cover the interest portion of your loan. This means that at the end of the term of your mortgage, you will still owe the lender the principal of your loan.
Although repayment mortgages are popular because they are simple and straightforward, they do not allow the borrower to tap potentially higher return investments during the entire 25 year period. With an interest only mortgage, you are required by the lender to make additional monthly payments into an investment vehicle, which will ensure that the monies will be there at the end of the term to cover the principal of the loan. This means that throughout the term of your mortgage, your money is working for you, instead of just going to repay the mortgage. One such investment option is an endowment mortgage.
With an endowment mortgage, you make monthly mortgage payments to your lender, which cover the interest payments on your loan and you make additional payments to an insurance company to fund a savings plan. The savings plan will at the end of your mortgage term have generated enough income to cover the repayment of the principal of your loan. There are two basic types of endowment mortgages: with profits and unit-linked.
A policy ‘with profits’ basically pays bonuses based on the performance of your investments, in most cases on an annual basis. A ‘unit-linked’ policy means that the value of the policy is determined by the investments made up to the point of the maturity of the policy. However, policy holders have the choice to change into less risky or volatile investments when the maturity of their policy is nearing, to maintain their capital gains. In either type of endowment mortgage, if the borrower dies prior to the maturity of the policy or mortgage, the life insurance aspect of the policy will cover the outstanding amount of the mortgage.
The advantage of an endowment mortgage is that the policy remains in place regardless of if you sell your house and buy another or even change mortgage companies. The insurance company who set up your endowment policy can include, besides life insurance, other coverage such as accident insurance or critical illness cover as well.