The Benefits and Pitfalls of An Endowment Loan

by Peter Kenny - Date: 2006-12-06 - Word Count: 458 Share This!

Endowment mortgage loans are one of the most controversial types of loans, and have received good and bad press in equal measure. If you are looking for a mortgage loan, then you should look at an endowment mortgage loan as one option. Despite these loans being quite popular, they can be complex to understand. If you want to know more about the benefits and pitfalls of an endowment loan, then here are some useful tips to help you.

What are endowment loans?

Endowment loans are a type of mortgage that comprises of two parts. The first part is an interest-only mortgage loan that works like any other mortgage of this type. However, combined with this is an endowment policy that you set up and mature in order to pay off the mortgage at the end of the loan term. The policy is set up to grow enough to pay off the amount you borrow.

Benefits of an endowment loan

The major advantage of an endowment loan is that you have very low monthly payments, like you would have for an interest-only loan. However, there is an added bonus in that you are investing in a savings policy that will pay off your mortgage loan. This means you are saving on your monthly payments as well as spending your money wisely by investing in a policy to pay off your mortgage. This can reduce the cost of your mortgage loan whilst still keeping your payments low.

Pitfalls of an endowment loan

As well as benefits there are also pitfalls to an endowment loan. Although the interest-only loan will reduce your monthly payments, paying off only the interest means you are paying money without reducing your debt in any way. And you are still paying money into an investment fund so your monthly payments are more than just the interest. Also, the investment fund is designed to pay off the mortgage loan in full, but this is by no means guaranteed. Many people are finding themselves in a situation where there is a shortfall in the policy and they are unable to pay off the mortgage in full.

Endowment vs. repayment loan

The major alternative to an endowment loan is the traditional repayment loan, where you pay off the loan and interest each month until the entire amount is repaid. These types of loan carry higher monthly payments, and are a safer option than endowment loans. However, during times when inflation is increasing an endowment loan is a good idea, as the risk is reduced and you can benefit from lower payments each month. The key as to whether an endowment policy is right for you depends on the current market and how willing you are to risk the policy falling short of the full loan repayment amount.

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