What Was an Endowment Loan?

An endowment loan was a type of mortgage that allowed the borrower to make interest-only payments each month. 澳洲幸运5官方开奖结果体彩网:Endowment loans were used in the United Kingdom. They allowed borrowers to make regular investments into an endowment or savings plan that matures when the mortgage came due. The funds in the endowment were used to pay off the principal balance of the mortgage. Endowment loans were typically offered by lenders, while the endowment was managed✨ by ins🐠urance companies. However, the federal government discontinued endowment loans.

How Endowment Loans Worked

Endowment loans or endowment mortgages were prevalent in the U.K. and were among the most popular way for consumers to finance their home purchases. There were several nuances to these loans, which made them highly attractive. In effect, they were equal parts mortgage and insurance pol▨icy. As noted above, these types of loans are no longer offered.

Borrowers would take out a mortgage or home loan with a lender and an endowment with an insurance company to match it. Borrowers made interest payments on their mortgage and regular premiums to the policy issuer on the endowment. Once matured, the endowment balance would pay off the entire principal mortgage at the end of the loan's term.

For instance, a homeowner with a $150,000 mortgage with their bank takes out an endowment policy for the same amount with an insurer—both with a maturity date of 25 years. During the course of the loan, the borrower makes interest payments of $850 (at a rate of 6.8%) and monthly premium payments of $250 to the insurer. If markets remain steady and the endowment's 澳洲幸运5官方开奖结果体彩网:cash value hಞits $150,000 after 25 years, it is used to pay off the mortgage.

Consumers preferred endowment loans over traditional mortgages because of the lower cost associated with the interest-only payments. And since the endowment was often linked with market performance, there was an expectation (or hope) that the investment's earnings would grow to at least the value of the mortgage to pay it off. Any amount beyond the value of the mortgage loan's 澳洲幸运5官方开奖结果体彩网:principal balance went to the borrower. However, any s🔯hortfall was covered by the homeowner.

History of Endowment Loans

Endowment loans were very popular in the mid-1980s and 1990s. According to the Bꦇritish government, the majority of borrowers used them over any other type of debt to finance their homes.

As many as 83% of homeowners used endowment loans in 1988. Roughly 23% of mortgages were linked to an endowment in mid-2000. Regulators estimated that nine million mortgages were linked to endowment plans by 1999.

Warning Signs

Their low cost and the potential to generate a return on the endowment attracted many borrowers to these loans until inflation began eating away at the earnings. According to the U.K. Parliament, "From 1982 onwards it never exceeded 10% and never rose above 5% after 1991. In such circumstances, the nominal returns of endowment policies collapsed proportionately."

The tax incentives associated with endowment loans also ceased to exist as new tax laws went against borrowers. Any 澳洲幸运5官方开奖结果体彩网:tax relief associated wit🍌h premiums made to endowments that borrowers received no longer applied.

Criticism and Collapse

Industry officials, including lenders and insurers, often encouraged borrowers to take out these loans with promises of large returns from their endowments. However, they were criticized for not warning consumers about any associated pitfalls. For instance, a 🌠drop in endowment earnings left many borrowers with a shortfall they were responsible for when it came time to pay off the principal.

A review of mis-selling pensions led 澳洲幸运5官方开奖结果体彩网:financial regulators in the United Kingdom to review other products. The Financial Services Authority began its investigation in March 1999. Over the course of several years, regulators discovered "poor selling practices and inadequate record-keeping" among service providers.

Investors received notices with a recalculation of the expected performance of their end💞owm🐓ents. These were color-coded letters warning investors:

• Green: The plan was on track to meet its target maturity value.
• Amber: There were risks that could affect the plan's potential to reach its target by the maturity date.
• Red: The plan was 澳洲幸运5官方开奖结果体彩网:high-risk and would likely not pay out the full value as promised. Paying off the principal balance would, therefore, require the borrower to cover the shortfall.
  

As a result, the market for endowment mortgages ceased to exist.

Advantages and Disadvantages of Endowment Loans

Advantages

Endowment loans offered many incentives for borrowers. Chief among them was the lower monthly payments since they only paid interest on the loan. This relieved them of the burden of making much costlier 澳洲幸运5官方开奖结果体彩网:principal and interest pay🌊ments so they could concentrate on other financial issues.

Although they were required to make premium payments to their endowment or savings plans, this money had the potential to grow. In some cases, borrowers were able to pay off the mortgage balance at maturity and keep any additionဣal sum left over in their endowment.

Disadvantages

Despite these benefits, endowment loans were riskier than traditional mortgages. Endowments did have the potential to lose value or experience negative growth because of changing 澳洲幸运5官方开奖结果体彩网:interest rates until they matured.

A shortfall resulting from a drop in the endowment's value meant the borrower was responsible for the mortgage loan's principal balance at the maturity date. Some homeowners were left in financial distress if they didn't have the financial resources to cover the remaining balance.

The Bottom Line

Many individuals dream of becoming a homeowner, but the cost associated with purchasing a property can be daunting. British consumers had a saving grace: the endowment loan. These were mortgages that were linked to endowments, allowing them to make interest-only payments and deposit premiums to an investment that would grow over time. Upon maturity, the endowment would cover the principal balance with the potential of a payout of excess earnings. However, regulators found that service providers mis-sold these products and didn't warn consumers about the risks. As such, endowment-linked mortgages ceased to exist.