If you're planning on buying a house and are considering taking out a mortgage, you might be wondering what type of mortgage to apply for.  One option that you might be considering could be an endowment mortgage.  But how does an endowment mortgage work and would one suit your circumstances? 

The best course of action here would be to discuss the matter with a reputable and experienced mortgage broker in your area, but in the meantime, here's a brief overview on how endowment mortgages work.

What is an endowment mortgage?

An endowment is a complicated financial product that combines life assurance and investment elements all in one package. 

The idea of an endowment mortgage is that the endowment investment fund accumulates sufficient value to clear the interest on the loan by the end of its agreed term.  The life assurance element ensures that the whole debt is paid off in the event that you die during the term of the policy.  This means that your family would not be left with the worry of a mortgage to pay if you died. 

You pay a monthly premium during the life of the mortgage, and at the end of every year of the policy's life, a bonus amount, (the reversionary bonus), may be added to the pot if the endowment fund performs well.  Depending on how well the policy performs, there may even be funds left over at the end of the term for you to spend as you wish, once the mortgage loan has been paid off in full.  At the end of the term, you would receive a lump sum called the terminal bonus.

If you decided to cash in your endowment at any point during its term, you would only receive the reversionary bonus amounts that had accumulated on the policy, not a terminal bonus.

Is an endowment mortgage right for you?

If you have a family, an endowment mortgage could be a good way of providing them with financial protection in the event of your untimely death.  However, the premiums you would pay on an endowment mortgage tend to be higher than a repayment-only mortgage would attract, and there's no guarantee on the return that could be provided by the investment fund.  For this reason, you may prefer to explore the options of taking out a standard repayment mortgage together with a separate life insurance policy.

In conclusion

If you are unsure what kind of mortgage would be best for you, the best thing to do is to discuss your personal circumstances with an experienced mortgage broker or advisor.  They will be best placed to source a good deal for you.

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