Is Your Mortgage Finance Built On Shaky Foundations?
While we have all witnessed the recent mortgage endowment mis-selling episode, and the compensation payments which are still being agreed, it seems that many people are still happy to include mortgage endowments in their housing finance. Are they asking for trouble?
An endowment mortgage is made up of two separate elements, a regular interest only payment, and a payment to an endowment policy which is often invested into various areas of the UK stock market. While the interest on the mortgage is paid regularly to the financial institution who arranged the mortgage, they will only receive the original capital repayment when the mortgage ends, and the endowment policy is encashed. This is where the trouble can begin!
The recent mortgage endowment mis-selling scandal arose because of the vast number of people who found that their endowment policies had not performed in line with original forecasts, and there was a shortfall on the original capital amount owed (in many cases, an extremely large short fall). Primarily, this was a result of a prolonged period of under performance in the stock markets of the world, and miscalculation on behalf of the endowment provider.
We are currently in a situation where UK house prices have never been higher, with many forecasting a further rise before any substantial fall is experienced, yet many people are still taking out endowment mortgage policies. While they can sometimes work out very well (with some earlier endowments actually producing a surplus after repayment of the original mortgage capital) they do have major risks. Add together the fact that taxes seem to be increasing on a regular basis, and the pensions debacle, and you begin to see how tight money really is.
The basic alternative to endowment mortgages is the capital and interest mortgage, whereby you actually pay off the interest and part of the capital on a regular basis. Even though this is the more expensive option, at least you know how much of your mortgage is remaining at any one time, and you are not depending on the investment performance of an endowment policy.Â
What would you rather have for peace of mind?
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