You might have heard of an endowment mortgage, but they’re no longer available. Existing mortgages might still be held by those that haven’t finished paying them off, but it’s now impossible to get a new endowment mortgage.
Here we go into a little more detail about what endowment mortgages involved. Find out more about this type of mortgage and why it’s no longer available.
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An endowment mortgage is a type of interest-only mortgage. These mortgages used to be very popular, but now you can’t apply for them at all. Some endowment mortgages do still exist, but they’re ones that were taken out before the turn of the millennium.
As an interest-only mortgage, an endowment mortgage wasn’t repaid automatically. With an interest-only mortgage, you borrow the capital and interest is charged on what you’ve borrowed. Your monthly payments only cover interest charges, so your capital doesn’t decrease. This is different to a repayment mortgage, where higher monthly payments will clear your interest charges as well as reducing your debt.
With an endowment mortgage specifically, borrowers were given a few different linked financial products. You’d get your mortgage but also be provided with an investment account. Your monthly payment wouldn’t just cover interest but would also put a bit of money aside to be invested throughout your mortgage term. Once your mortgage term came to an end, the hope was that your investments would have done well enough to repay and clear your mortgage debt.
Since the investments were linked to the financial market, borrowers hoped that their investments would successfully pay back what they owed to the lender. Many also hoped that they’d be left with a profit if investments did particularly well.
Often, the benefits and risks weren’t properly considered. The benefits were overstated, expectations ambitious, and the risks not fully understood. People took out their mortgages, feeling optimistic, and only noticed problems years later.
As well as including an investment account, endowment mortgages provided life insurance. This meant that if you died before your mortgage term ended, your mortgage debt would be paid off anyway. People liked these mortgages because they offered the promise of an easy solution. Payments would be low throughout the mortgage term, but the investment would payout with the money that was needed to become debt-free at the end.
Sadly, there were also obvious risks to endowment mortgages. If investments weren’t successful enough – and often, that was the case – people were left with huge amounts of debt and no reasonable way to pay it back.
Endowment mortgages are considered to have been part of a mis-selling scandal. Lenders made over-ambitious promises, suggesting to borrowers that the returns on their investments would provide them with comfortable futures. Most endowment mortgages were taken out in the 1980s, but a decade later, it was becoming clear that lenders had promised too much.
Lenders were forced, by regulators, to tell their customers what they should expect. Through the 1980s, many people received bright red warning letters. These letters encouraged them to make other plans to pay back the money they’d borrowed because it was clear that their endowment investments weren’t going to make enough money.
Customers that had an endowment mortgage were encouraged to make other plans. Some remortgaged, choosing repayment mortgages, whilst others used their pensions and savings. Many more didn’t have any other savings to fall back on, leaving them with an endowment mortgage that they hoped would come good at the end.
Today, those still on endowment mortgages might be struggling to pay back their debts. Mortgage terms are coming to an end, and investments haven’t done what they needed to.
Property prices have risen quite a bit since endowment mortgages were popular. Many homeowners are selling their homes, using the money to clear their mortgage and the extra cash to buy somewhere smaller. Others are cashing in their endowments, using the money to reduce their mortgage and then switching the rest to a repayment plan.
Insurers and brokers can be held responsible for endowment mortgage mis-selling. In many cases, the risks weren’t made clear, and the benefits were oversold.
If you believe your endowment mortgage was mis-sold, you should first complain to the lender or broker that sold it. If they don’t provide a satisfactory response, you can contact the Financial Ombudsman.
You may be able to claim and receive compensation if you can show that it wasn’t made clear that there could be an investment shortfall. You could also claim if you were told that your endowment would clear your mortgage, rather than if you were simply told that it might.
Brokers and lenders should have assessed your budget and your attitude to risk. If a thorough assessment wasn’t carried out, you could argue that your mortgage was mis-sold.
In order for a claim to be accepted, the claim must be made within three years of you discovering your mortgage was mis-sold. Many claims are turned down because homeowners have waited too long to try and claim compensation. In most cases, the three-year countdown starts when you receive your warning letter from your lender. If your lender sent a warning letter in the 1990s, it’s too late to act now to try and get compensation.
Though endowment mortgages aren’t an option today, you can still get an interest-only mortgage. However, the lender will expect you to provide a clear plan for mortgage repayment. Before you can get an interest-only mortgage, you’ll need to show clearly how your debt will be paid back and that you understand the risk you’re taking on.
In most cases, interest-only mortgages aren’t available to those with low deposits. Some lenders will ask for at least a 50% deposit to be paid up-front, with only 50% of the value of your home being covered by an interest-only mortgage.
Here at Money Savings Advice, we have partnered with one of the UK’s leading Compensation claims specialist, and they have already helped thousands of our readers get the compensation they deserve for mis-sold endowment mortgages.
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