If you can’t make up your mind on whether to apply for an endowment or repayment mortgage, you may want to look at the features of both types. In the UK, repayment mortgage is a term describing mortgages whereby monthly payments serve to pay off the capital amount, along with the interest accrued. In this way, the borrowed amount decreases continuously throughout the mortgage term, and the mortgage loan is repaid in full by the end of the term. An advantage of this type of mortgages is that it eliminates the risk of making investments, as with the endowment mortgage, the profitability of which depends on the performance of the stock market. Negative equity is also less likely to occur given that the outstanding balance is reduced on a monthly basis. With time, the percentage of equity in the property goes up. While the bulk of monthly payments go toward paying the interest in the early years, later on, payments go toward paying back the capital amount. Borrowers who keep up with all monthly payments are guaranteed to have the loan repaid by the mortgage term. For this reason, the repayment mortgage type is the most popular product and the safest option in the United Kingdom.
The other option you had on your mind – the endowment mortgage – works in a different way. Endowment mortgages are a type of mortgage loans with which the capital amount is to be repaid through one or several endowment policies. The term is mostly used by consumers and lenders in the United Kingdom, meaning that this arrangement type should not be taken for a real legal term. The mortgage is typically paid back through low cost policies, with endowment policies being a type of a life insurance contract. The latter pays a lump sum in case of death or after a preset term. Typically, the maturities are twenty, fifteen, and ten years, and an age limit usually applies. With some insurance policies, a lump sum is paid only in case of critical illness.
Basically, an endowment mortgage is a loan arrangement whereby the borrower only pays interest to the creditor. The repayment installments on the principal amount go to the life insurance policy. The latter matures on the date on which the endowment mortgage is due. Alternatively, the mortgage loan is paid off on the death of the policy holder. Borrowers who opt for this scheme sign two separate agreements. They sign one with the endowment policy insurer and another one with the lender that extends the mortgage loan. These arrangements are distinct in nature, and they may be altered. The endowment policy, however, serves as an additional security for creditors.
There are some risks and problems associated with endowment policies which serve to pay back the principal amount. One of them is that the interest charged on the mortgage loan can be less than the growth of the investment. Another issue is that some creditors have been found to systematically mis-sell endowment mortgages.