Endowment mortgages were once a popular way to repay a home loan in the UK, especially during the 1980s and 1990s. However, many borrowers later found that their endowment mortgage policy might not provide enough money to repay the mortgage in full.
If you have an endowment mortgage or an existing endowment policy nearing maturity, it is important to understand the options available to you.
In this guide, we explain how endowment mortgages work, whether they are still available in the UK, what steps you can take if there is a shortfall, and how specialist mortgage advice can help.
What is an endowment mortgage?
An endowment mortgage is a type of interest-only mortgage linked to an investment policy called an endowment policy. Instead of repaying the mortgage capital each month, borrowers only pay the interest to the lender.
At the same time, separate monthly payments are made into the endowment policy. This policy is designed to grow over the mortgage term and repay the mortgage balance at the end.
How do endowment mortgages work?
An endowment mortgage policy usually combines:
- An interest-only mortgage
- A life insurance policy
- An investment or savings element
The aim was for the investment growth within the endowment policy to repay the original mortgage balance and potentially leave a surplus.
However, investment performance did not always meet expectations. As a result, many borrowers faced, or still face, possible shortfalls.
Can you still get them in the UK?
Endowment mortgages are no longer widely available in the UK and are now largely viewed as outdated when compared with modern repayment mortgage products.
Most lenders stopped actively offering endowment mortgage products after concerns grew in the late 1990s and early 2000s about investment underperformance and mortgage shortfalls.
Although new endowment mortgages are now rare, many people in the UK still have older endowment policies that remain active or are close to maturity.
Steps to take if you have a shortfall on an endowment policy
If your provider has warned that your endowment policy may not fully repay your mortgage, it is important to take action early rather than waiting until the policy matures.
Here are some possible steps to help manage the situation.
Review your projected shortfall
Most providers send regular projections showing whether your policy is on track to repay the mortgage balance.
Understanding your estimated shortfall can help you work out how much action may be needed.
Speak with a mortgage advisor
A mortgage advisor with experience in endowment mortgage policies can review your current mortgage structure, remaining balance, and available repayment options.
They can then help you consider ways to reduce any potential funding gap.
Consider switching
Some borrowers choose to switch all or part of their mortgage onto a repayment basis. This can help gradually reduce the outstanding balance before the endowment policy matures.
Make additional mortgage repayments
Depending on your lender’s terms, making mortgage overpayments could help reduce the amount you still owe when the endowment policy ends.
Review your investment strategy
In some cases, reviewing the investment performance of your endowment policy with expert advice may help you decide whether to keep or replace the current investment.
The earlier you deal with a projected shortfall, the more options you may have to reduce financial pressure later.
Frequently Asked Questions
When an endowment mortgage reaches the end of its term, the investment policy usually matures and pays out its final value. This money is then normally used to repay the outstanding mortgage balance.
If the policy pays out less than expected, you may still owe money to the lender. In this case, you would need to repay the remaining shortfall separately.