How to choose an endowment mortgage

Required Reading


  


How to choose an endowment mortgage


If you have accepted the basic arguments for using the endowment route for your mortgage -or it may be that this is all you are able to lay your hands on in times of a mortgage famine -how do you choose which life company to use?

There are two aspects to an endowment policy, and, while admitting that quotations are confusing, they are all that you have to go on. In the first place, they show the actual premium rates that you will be paying. While it is not necessarily true that 'cheapest is best', this is one factor that you can compare in a straightforward manner.

Secondly, there are the projections shown of the surplus at the end of the mortgage term. I hope I have said enough to indicate that these projections should be treated with the utmost caution. It is true that they are based on what has actually happened in the past and are not just figures pulled out of the air.

But, as we have said, economic circumstances may change, and so you should not place too much reliance on the actual figures. There is a further point to be borne in mind. Remember, your mortgage is likely to last at least 25 years, and if, as is common, you move house two or three times and take on fresh commitments as you go, your mortgage days will probably carry on for a good 30 to 35 years -by which time the investment managers in your life company at the time you took out your mortgage are likely to have retired and their successors might not produce such good results.


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Bonus rates in the future


To answer the above question is almost an impossibility, as quite simply, no one can predict the course of inflation, interest rates and the general economic state of the country over the next 25 years. But it is on precisely these factors that the level of future bonus rates depends.

During the 2000s both inflation and interest rates were at historical highs for much of the time. This meant that investors enjoyed very high rates of return on their money paper. Now that inflation is much lower, so is the level of interest rates. Investors (including life companies) will therefore be earning less in monetary terms on their assets.

If this situation is going to continue, then one of these days life companies will be forced . . .... see: Bonus rates in the future


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