Pros and Cons of an Endowment Mortgage

An endowment mortgage is a unique type of mortgage because it comes with an investment plan. In essence, this is a combination of an interest-only home loan and an endowment policy. During the term of the loan, your monthly payments will cover the interest of the mortgage and your monthly contribution to a life insurance company which, in turn, will invest the money in your endowment plan. The goal of the savings plan or endowment is to make enough money from your investments to help pay off your mortgage principal by the time your loan matures.

Before you decide to get an endowment home loan, it is vital that you completely understand the terms of the loan. To help you make an informed decision on whether this type of mortgage is ideal for you, here are its advantages and disadvantages.

Pros of Endowment Mortgage

Affordability is one of the main reasons why a lot of people choose this type of home loan over ordinary mortgages. The sum of the monthly payments for the loan interest and the monthly contributions to the endowment fund is still smaller compared to the amount of money paid out monthly by people with ordinary home loans. While an endowment loan is an interest-only mortgage, you are actually putting money in a savings plan intended to cover the full payment of your mortgage upon maturity.

In this type of mortgage, there is a possibility that you can pay off your loan earlier than expected or even get a sum of money at the end of your loan’s payment period if the return on your investment is high. When that happens, the total amount of money you have saved in the fund is bigger than the amount of your loan.

Since endowment home loans come with life insurance, you will also get coverage for only 25 percent of the price of a standalone life insurance policy. The coverage is good for the whole payment period of the mortgage.

Cons of Endowment Mortgage

One major disadvantage of an endowment mortgage is the risk of a shortfall. Since there is no guarantee that your investment plan will post gains, you might not have enough money to pay off your financial obligations when your payment period ends. In order to prevent this problem, it is important for you to regularly check the performance of your investments so you will know if your gains will be enough to pay off your debt. You can also opt to increase your monthly contributions to help increase your chances of raising enough money to settle your obligation without a hitch.

Aside from high fees associated with an endowment policy, another problem that many people encounter with this type of loan is its inflexibility. You can be slapped with penalties if you decide to cash in your investment policy early.

Lastly, an endowment home loan is quite hard to understand. Many people end up having financial woes and even face foreclosures because they did not fully understand the risks involved when they signed up for this type of mortgage.

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