Reasons For An Endowment Mortgage
The customer pays only the interest on the capital borrowed, thus saving money with respect to an ordinary repayment loan; the borrower instead makes payments to an endowment policy. The objective is that the investment made through the endowment policy will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus.
Up to 1984 qualifying insurance contracts (including endowment policies) received tax relief on the premiums known as LAPR (Life Assurance Premium Relief). This gave a tax advantage for endowment mortgages over repayment. Similarly MIRAS (Mortgage Interest Relief At Source) made having a larger mortgage advantageous as the MIRAS relief reduced as a repayment mortgage was repaid. This tax incentivisation toward endowment mortgages is not often commented on in the media when they discuss endowment mortgages.
An additional reason in favour of an endowment was that many lenders charge interest on an annual basis. This meant that any capital repaid on a monthly basis is not removed from the outstanding loan until the end of the year thus increasing the real rate of interest charged. In such a situation, payments into an endowment might benefit from any growth from the moment it is invested. Henceforth, the net investment return required for the endowment to pay the loan, would be less than the average mortgage interest rate over the same period.
Read more about this topic: Endowment Mortgage
Famous quotes containing the words reasons for, reasons, endowment and/or mortgage:
“Happy the man who has been able to know the reasons for things.”
—Virgil [Publius Vergilius Maro] (70–19 B.C.)
“The lore of our fathers is a fabric of sentences.... It is a pale gray lore, black with fact and white with convention. But I have found no substantial reasons for concluding that there are any quite black threads in it, or any white ones.”
—Willard Van Orman Quine (b. 1908)
“... it matters not what natural endowment a race may have if it prostitutes itself to the service of death.”
—Rebecca West (1892–1983)
“We are playing with fire when we skip the years of three, four, and five to hurry children into being age six.... Every child has a right to his fifth year of life, his fourth year, his third year. He has a right to live each year with joy and self-fulfillment. No one should ever claim the power to make a child mortgage his today for the sake of tomorrow.”
—James L. Hymes, Jr. (20th century)