Endowment Mortgage Can Lead To Shortfalls

Endowment policies was something that was issued in England in the 70’s and 80’s and though the intention was that they would in the time specified pay off the entire mortgage completely, this did not always occur. Ah, I hear someone asking what are endowment policies. Wikipedia defines it as;

An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase endowment mortgage is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal term.

The borrower has two separate agreements. One with the lender for the mortgage and one with the insurer for the endowment policy. The arrangements are distinct and the borrower can change either arrangement if they wish. In the past the endowment policy was often taken as additional security by lender. That is, the lender applied a legal device to ensure the proceeds of the endowment were made payable to them rather than the borrower; typically the policy is assigned to the lender.

The problem was when shortfalls did occur many owners of the policy were not able to meet said shortfalls forcing them to surrender them to the issuing insurance companies for ridiculously low prices. The UK government stepped in giving people the right to use the services of sell endowment policy firms enabling them to get a much higher price.