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UK Endowment Mortgages

An endowment mortgage is effectively an interest only mortgage with an additional savings plan in the form of an endowment policy. Monthly contributions are made to a Life Insurance Company who invest your money in the savings plan. Life insurance is built in to the savings plan so your mortgage is repayed if you die before the endowment policy reaches maturity.

Endowment policies typically take two forms; 'with-profits' and 'unit-linked'.

A 'with profits endowment' has two bonuses; a reversionary bonus and a terminal bonus. The reversionary bonus is paid each year and is guaranteed if the policy is maintained until its maturity date. The terminal bonus is paid on maturity of the policy and is dependant on the performance of the underlying fund.

The value of a unit-linked policy is determined by the value of the underlying investment at the maturity date. The value of units on a unit-linked policy can go down as well as up.

Advantages of Endowment Mortgages

If the investment growth rate exceeds those estimated at outset you may be able to pay off your mortgage early or enjoy a lump sum at the end of the repayment period, in addition to paying off your mortgage.
The life insurance cover can be cheaper than if purchased on its own.
The mortgage can be transferred to another property.

Disadvantages of Endowment Mortgages

Endowment plan charges are relatively high.
You have no guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the investment could perform below that assumed at the start. (By monitoring your investment's performance you could make additional contributions during the repayment period if you felt the fund was under performing.)
Endowment plans are less flexible than other types of investments, with most plans not allowing you to stop and start premiums. Some plans charge penalties if you stop paying premiums.

Use Isa to pay off Mortgage ?

An ISA mortgage is effectively an interest only mortgage with an additional investment plan in the form of an individual savings account (ISA). An ISA is a stockmarket based investment that benefits from tax free growth.

Strictly speaking, an ISA is not an investment but a 'wrapper' within which an investment can benefit from tax free growth. Choosing an individual savings account is a subject in itself.

(Individual savings plans replaced personal equity plans (PEP's) in the 1999/2000 tax-year, although PEP funds can remain invested.)

Advantages

If the ISA performs well you may be able to pay off your mortgage early or enjoy a lump sum at the end of the repayment period, in addition to paying off your mortgage.
ISAs are potentially tax efficient, particulary for higher rate taxpayers.
An ISA can be selected to suit your circumstances and risk profile.

Disadvantages

Your debt remains constant throughout the mortgage period.
You have no guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the ISA could perform below expectations. (By monitoring your ISA's performance, you could make additional contributions during the repayment period if you felt the underlying fund was under performing.)

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