Endowment Mortgage - Problems With Endowment Mortgages

Problems With Endowment Mortgages

The underlying premise with endowment policies being used to repay a mortgage, is that the rate of growth of the investment will exceed the rate of interest charged on the loan. Toward the end of the 1980s when endowment mortgage selling was at its peak, the anticipated growth rate for endowments policies was high (7-12% per annum). By the middle of the 1990s the change in the economy toward lower inflation made the assumptions of a few years ago look optimistic.

Significantly, endowment mortgages continued to grow in the 1980s even after Life Assurance Premium Relief had been abolished (1984). Moreover, their share of the mortgage market held up in the 1990s despite the fact that the Treasury began to steadily reduce MIRAS, which also worked in favour of interest only mortgages, and despite a prolonged period of relatively low inflation (something which worked against interest only mortgages). The fact that endowment mortgages were later found to have been systematically mis-sold probably explains this disjunction.

Regulation of investment advice and a growing awareness of the potential for regulatory action against the insurers lead to reduction in anticipated growth rates down to 7.5% and eventually as low as 4% per annum. By 2001 the sale of endowments to repay a mortgage was virtually seen as taboo.