What went wrong with endowment mortgages?

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What went wrong with endowment mortgages?

Endowment mortgages were extremely popular in the 80s and 90s and it's not hard to see why.

They were promoted as a cheap and reliable way to clear your debt.

Although they're still around, they aren't seen that way now.

Endowment mortgages combine an interest-only home loan with a stock market investment an endowment policy which also includes life insurance.

This means there's no need to pay for a separate life policy to repay your debt in case the worst happens.

But this was just a small part of the allure when these mortgages were in their heyday.

The idea was that the endowment policy, which was invested in company shares through the stock market, would make enough money to pay off the capital part (the amount originally borrowed) of the mortgage debt with thousands of pounds to spare.

The salesmen and women who promoted these policies made commission on every one they sold, so it's not surprising they talked them up to the skies.

And, to be fair, in those days most of them believed they were an excellent product.

Misplaced optimism

What they hadn't allowed for was the unpredictability of the stock market.

Economic, political or psychological factors can send share values plummeting at any time.

And this is basically what happened.

Share price growth faltered and values started to fall, taking the value of the linked endowments with them.

Although share prices generally have been on an upward trend for the past few years, it's unlikely we will ever see the growth needed to get these policies back on track.

(And it wouldn't necessarily be a good thing if we did, as it is now recognised that growth of this level tends to be unsustainable over the long term.)

As a result, most policies will never be worth anything like what was hoped.

That means the majority of people who took out an endowment mortgage face a shortfall of several thousands pounds, which they will have to make up by other means.

To find about the various ways to deal with this, read What should I do with my endowment? and How to make up an endowment shortfall.

To read more on this subject please see the list below or your mortgage guide or your home buying guide

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