Endowment Basics

• In a general arrangement for endowment mortgages, lenders grant borrowers mortgage loans with the understanding that only interest payments will be paid to the lender. An additional amount--preset at closing--is contributed to a policy that is invested and will eventually repay the principal balance on the mortgage loan. Before committing to an endowment mortgage, make sure you are comfortable tracking the progress of your endowment policy. Also, you must make sure you understand the risk that, when the mortgage comes due, there may not be enough in your policy to repay your mortgage loan. You'll be notified several years in a "reprojection" letter if your fund is in danger of short-falling.
  
  

Benefits

• Financially savvy investors have found that endowment mortgages can actually make money. Instead of prearranging all principal and interest payments to a lender, these borrowers invest wisely and end up with more money than needed to pay off the existing loan--giving the borrower cash in hand. These loans are also beneficial for real estate speculators as they decrease an investor's monthly outgo by only requiring interest payments. Before committing to an endowment loan and policy, make sure you are well-capitalized--so that in the event of a shortfall you can make up the difference--and familiar with the stock market.
  
  

Pitfalls

• Average consumers can get caught up in the appeal of the endowment mortgage. Some customers do not pay enough into the endowment policy and end up with a shortfall. Others make poor investing decisions and similarly need to come up with extra cash. In the worst cases, some consumers are duped into taking out endowments when they are not fully cognizant of the potential consequences. To file a complaint with the FSA (Financial Services Authority) see resources. In general, speak with your lender extensively about mortgage options before committing yourself to a risky loan.