MyFinances.co.uk
News feeds Free newsletter

All the latest personal finance news - helping you make the most of your money

Remortgage guide
What are endowment mortgages and why are they important - myfinances.co.uk

  • Endowment mortgages

    Endowment mortgages see monthly repayments not paying off what you have borrowed, but just the interest of the loan. More...

Endowment mortgages: The background

Endowment mortgages were the hot financial product fuelling the housing boom in the 1980s and beyond.

The idea was simple - stock markets grow faster than interest on debts. That meant, instead of putting money into paying off your loan, it was better value to just pay the interest on the loan and put the spare money into the markets using an endowment fund.

If all went to plan, not only would this be cheaper than paying off the loan directly, but you could even be left with a few thousand pounds extra at the end of the deal if the markets performed better than expected.

And for a while this was exactly what happened - with many people whose policies paid out in the late nineties seeing the full benefits and even surpluses.

But then the markets crashed.

In 2001 the markets lost 20 per cent and are still not fully recovered six years later; so all of a sudden rather than covering the loan with a possible bonus, endowments were falling short.

This meant millions of people were left facing bills of thousands of pounds when their polices expired and they had to repay their original loans.

And in many cases this came as a surprise, as when the policy was sold at a time of soaring stock markets the possibility of a shortfall was not even mentioned.

In 2001, when the stock market dot.com bubble burst and billions of pounds were wiped from the stock markets, there were nearly 11 million endowment policies still in use.

It was at this point the scandal broke.

All of a sudden, after decades of making payments, Britons were faced with a bill rather than a mortgage-free life.

Banks sent out reprojection letters showing if funds were on track to meet their loan requirements - and millions of people faced with a shortfall started complaining to their mortgage providers.

An entire industry was built up around trying to get people compensation for their shortfall.

The rules were simple - if the possibility of being left with a shortfall was not properly explained when the endowment mortgage was sold, then the mortgage holder was entitled to compensation.

This would pay the difference between where the policy is now, and where the policy holder would have been now if the mortgage holder had paid premiums into a standard repayment mortgage.

But faced with shortfalls of thousands of pounds a wave of confusion panicked many homeowners - leading to claims firms springing into existence and a large number of questions over what to do next.


Recommended ... 


Disclaimer:
myfinances.co.uk is not authorised to give advice under the Financial Services and Markets Act 2000.

Terms:
By using this site, you are deemed to have accepted our terms of use.

myfinances poll 

As a global banking crisis hits, we want to know how the crisis is affecting you. Is your money safe? Vote now and tell us your views.

Free stuff 

Sign up for our free daily newsletter and other free stuff.