Probably one of the most popular home loans available to new home buyers in the mid 1980s, today endowment mortgage home loans are more likely to be known for the scandal of miss-selling that seems to have embroiled them of late. Nonetheless, correctly constructed, endowment mortgage loans can be an extremely lucrative means of financing a home purchase.
Essentially, an endowment mortgage home loan operates as an investment fund, the proceeds of which, upon maturity, will be used to repay the lump-sum principal amount then outstanding in the home loan account. This type of investment fund mortgage repayment mechanism, however, relies heavily on the stock exchange, as this is where capital growth needs to occur if the home loan is going to have any chance of being repaid on the maturity date.
Initially, given the historic rise of stock markets over the past century, mortgage home loan advisors believed that the stock markets that drive the underlying investment fund that is going to be used to repay the home loan could not possibly fall in value, especially given that the home loan was over 20 to 25 years. As such, in many cases the endowment home loan was sold not only as a means of being able to repay your home loan principal sum in 20-25 years, but also as a means of accruing a little nest egg. However, as events later showed, if not looked after carefully, it was very possible that not only would you not be able to get a nest egg out of your endowment home loan, but there was also a very real chance that on maturity of the endowment investment fund the funds being paid out would not be sufficient to repay the then outstanding principal home loan. In such a case, it was the responsibility of the home mortgage lender to make up any shortfall, which could be considerable.
Today, however, endowment home mortgage loans are sold on the clear understanding that any investment you make in the underlying investment fund may not be sufficient to cover full repayment of your home loan and that if there is any short-fall you, as the lender, will be expected to make up that short-fall. In other words, endowment home loans operate in much the same way as any other equity-linked fund, namely that they can increase or fall in value dependent on the level of the stock exchange on the day that the policy matures.
For the above reasons, financially an endowment home loan mortgage can be a very useful tool in helping you to purchase a new home. It should be noted, however, that it is not without its risks and that you will need to carefully monitor the state of play of the underlying endowment investment portfolio to ensure that you will have sufficient funds to repay the principal of your home mortgage loan on the day that the investment fund matures, which also happens to be the same day as your home loan principal is due. If, at any time, it looks like there may be a short-fall between the amount you are expecting to be paid out from the investment fund and the amount outstanding on your home loan, you make efforts to make up this short-fall. Keeping close tabs on the state of the investment like this should ensure that you are not hit with a great big bill at the end of the 20-25 year term in order to make up any short-fall.