savings plan/investment type mortgage

[Unregistered]

I am looking at a savings plan/investment type mortgage where part of the monthly repayment is paying off interest and the other part is savings that are invested-earning interest-that is then saved and at the end of the term used to pay off the loan. Not sure if this is a good idea or not. Is there a problem with not buying equity in the property as I go along? Is this like an interest only mortgage? What is this type of mortgage actually called? Does anyone out there know the pros and cons of this type of mortgage? Or perhaps have one of these? I am attracted to it because the monthly repayments are less. Is there a catch somewhere?

 

[ClubMan]

I am looking at a savings plan/investment type mortgage where part of the monthly repayment is paying off interest and the other part is savings that are invested-earning interest-that is then saved and at the end of the term used to pay off the loan.

You mean an endowment mortgage so? The last part should really have read "that is then saved and at the end of the term HOPEFULLY used to pay off the loan". The problem is that this is not guaranteed and in the past this often did not happen because the investment/savings funds linked to the mortgage levied exorbitant charges and did not perform to the originally wildly optimistic expectations leaving borrowers with a shortfall when the term was up or looming. Many of these borrowers were then forced to choose between upping their endowment contributions, extending their mortgage term or switching to an annuity (often the latter was the prudent course of action).

Not sure if this is a good idea or not. Is there a problem with not buying equity in the property as I go along?

Endowment mortgages have had a bad rep lately for the reasons mentioned above.

Is this like an interest only mortgage?

And endowment mortgage is basically an interest only mortgage linked to an endowment/investment policy geared towards clearing the borrowed sum at maturity when the term expires.

What is this type of mortgage actually called?

Endowment mortgage.

Does anyone out there know the pros and cons of this type of mortgage? Or perhaps have one of these? I am attracted to it because the monthly repayments are less. Is there a catch somewhere?

Use the search facility (see the Search menu in the navigation bar near the top of the screen) and Google to find more comment and opinions on endowment mortgages. In general I personally (as a non finance professional mind you!) would not recommend endowment mortgages other than perhaps in very unusual circumstances.

 

[eamonn66]

the reason these things got such a bad rep is that brokers were paid much high commissions on them as opposed to repayment mortgages and therefore were very keen to push them. this was mede easy for them by gullible people who fell for the notion of a big windfall after their mortgage was paid off and never considered the possibility that the investment wouldnt pay off their mortgage.

 

[stuart]

One of the other problems with endownment mortgages is (and I feel the main reason why they have underperformed) is that they usually were a savings plan for a 20 year term

THerefore, to cash them in earlier than their maturity date is means you are more likely to lose money

Since most mortgages in this country average running around 8 years the saings policy is rarely given tge time to mature

The 8 yrs part comes from people trading up, trading down and re-financing which means the original 20 year loan term was not completed

I have seen the figures on a number of endownment mortgages that if they had have matured would have been very good investments
But I do not think they are a good product to be sold with a mortgage for the reasons I stated above (very unlikely to reach maturity and therefore full value)

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[Munsterdude]

It might not be a endowment mortgage. It could be a pension mortgage, which is a totally different thing. Pension mortages are a great way of saving money if you are either self employed or are a director in a company. Only applies to property investment though, not PDH's

 

[ClubMan]

It might not be a endowment mortgage. It could be a pension mortgage, which is a totally different thing. Pension mortages are a great way of saving money if you are either self employed or are a director in a company. Only applies to property investment though, not PDH's

A pension mortgage is not really a totally different thing to an endowment mortgage. Both are basically interest only mortgages linked to a savings plan - just that in one case it's an endowment savings/investment plan while in the other it's a pension. Tax treatment is one major difference between the two types of savings plan though.

What's a PDH?

 

[Unregistered]

Thanks all for the info and advice to clear up the confusion

 

[ClubMan]

Use the search facility available from the navigation menu near the top of the screen to find more topics dealing with related issues - e.g. endowment, pension and interest only mortgages etc.

 

[endowager]

Am I wrong or is this better overall news for endowment VS annuity mortgages:

Loan £46K in 1989 maturing in 2009:

Annuity Endowment
Interest Interest + .5% (3.5K £ extra)
Capital £46K Capital 0K
Premium £0K Premium £21.5K

Overall, the endowment mortgage costs £21K less so if the shortfall is less than £21K, the endowment mortgage wins out!