But policies taken out in the 1970s which gained from the boom years of their

But policies taken out in the 1970s, which gained from the boom years of their 1980s when they were earning 20 per cent returns a year, have proved good investments. According to Norwich Union, its 25-year endowment policies that matured four years ago paid out 4.4 times the amount needed to redeem the mortgage. But the main threat to endowment mortgages has been the fall in inflation, which has sharply reduced the profits that the policy investments can make and means the real value of the loan debt no longer falls as it did in the 1970s and 1980s. Endowment policies also include built-in life assurance to redeem the mortgage if the borrower dies.The pegging of tax relief to interest on the first pounds 30,000 of a loan and the reduction of tax relief to just 15 per cent of the qualifying interest payable has weakened the attraction of an endowment policy. The insurance company invests the premiums it receives, and the value of the policy grows each year through the addition of a modest annual bonus. When the policy eventually matures, the insurance company adds a terminal bonus, which varies with the success of the investments, and the combined proceeds should be more than enough to pay off the mortgage.The size of the loan in an endowment mortgage remains constant over its life, and the borrow- er will pay out appreciably more interest than on a repayment mortgage, but this will be partly offset by higher tax relief.

An endowment mortgage consists of a loan on which the borrower pays only interest to the borrower, plus a separate monthly payment to an insurance company for an endowment policy. Bank mortgages show a similar trend.The concept of an endowment policy has not changed. Since then, the percentage has drifted back, to 72 per cent in 1992 and 62 per cent in 1993. In the first quarter of 1995, it dipped below 60 per cent and in the second quarter was down to 53 per cent. The Building Societies Ombudsman endorsed that criticism in his annual report earlier this year.The comments are mirrored in the statistics. In the heady days of 1988, when houses sold like hot cakes, 83 per cent of all mortgages sold by building societies were backed by endowment policies, according to the Council of Mortgage Lenders. The financial media first cast doubt on the windfall bonuses more or less promised to borrowers who took out endowment policies to repay their mortgages in the 1980s.

Commentators pointed out that such profits were heavily dependent on levels of inflation.Lenders were accused of pushing endowment mortgages to earn commission from the insurance companies that provided the policies, long after the gloss had worn off the endowment’s charms. Both have advantages and disadvantages, many of which are dictated by external circumstances. Endowment mortgages
Endowment mortgages have come in for a bashing in recent years. In the late 1980s, endowment mortgages had more than 80 per cent of the market, but this has now fallen to just over 50 per cent as the repayment mortgage has made a comeback.