Mis-Sold Endowments

Although the popularity of interest only mortgages has decreased over the years – with some lenders refusing to even entertain interest only deals because of the risks involved – there was a time when this type of mortgage was very popular. With an interest only mortgage the monthly repayment that is made pays off only the interest on the mortgage loan, which means that no money is paid off on the principle loan amount.

The benefit to the consumers is that the monthly repayments are lower, sometimes by a significant amount. On the downside, it means that at the end of the mortgage term you will have paid off all of the interest on the loan, but you will still owe the full amount of the actual loan that you took out in the first place.

In order to address this issue anyone taking out an interest only mortgage also has to take out a sideline investment, which is known as an endowment. The idea is that the money paid into the endowment is invested and that it will grow over the term of the mortgage to provide the policyholder with the amount needed to pay of the actual loan balance at the end of the mortgage term.

With the other type of mortgage, which is a repayment or capital and interest mortgage, repayments are split between the interest and the actual loan, which means that at the end of the mortgage term both the interest and the loan have been repaid, thus there is no need for a separate endowment. The downside to this is that the monthly repayments are higher than on an interest only mortgage.

Over the past few years campaigners have brought to light the fact that many consumers taking out an interest only mortgage may have been mis-sold endowment policies. This means that consumers taking out an interest only mortgage may have been advised to take out endowments that were not suited to their needs and were therefore no appropriate for them.

Many people have lodged complaints over mis-sold endowment policies, claiming that they were never told of the risks associated with these policies – basically that there was a chance that the investment would not perform well enough to raise the money needed to pay off the mortgage loan at the end of the mortgage term.

As a result of mis-sold endowments the government has made sure that those affected have the right to claim compensation over the matter. Even where compensation has been awarded it has often been for an incorrect amount according to Which?, the consumer campaign group, and therefore those claiming for compensation over a mis-sold endowment should make sure that they are being properly compensation over the issue.

According to recent figures there are many endowment plans that will not have grown sufficiently to enable the policyholder to pay off their principle mortgage loan amount at the end of the mortgage term. Millions of homeowners could be affected by this, and many never even realized that there was a risk of being unable to repay their mortgage loan at the end of the term.

It was simply not explained to many consumers taking out interest only mortgages that an endowment was a risk and not a sure fire guarantee of being able to repay the mortgage, and therefore many consumers claim to have been sold the policies inappropriately without being warned about the dangers and risks.