Endowment Policies
Interest-only mortgages & investment schemes
If you take out a mortgage, you have two methods of paying it off. These are repayment mortgages, where you pay back interest and the money that you borrowed, and interest-only mortgages, where you simply pay back the interest that is being accrued by your mortgage. As you are only paying off interest with an interest-only mortgage, you need to find a way to be able to pay off your mortgage when the mortgage term has ended. One way in which you can do this is by paying money into an investment scheme, such as an endowment policy. You should invest enough that by the time your mortgage term is complete, you will be able to pay off your mortgage.
How does it work?
Endowments are long-term saving policies which last for 10-25 years. You can use an endowment policy to save up a tax efficient lump sum for any purpose, but they are most commonly used to pay back mortgages. An endowment will normally include life assurance which will pay off your mortgage if you die before the end of your policy.
There are two main types of endowment policy: with-profits and unit-linked.
With-profits schemes
In a with-profits endowment policy, your money will grow in two ways. Firstly, the company that you have taken the scheme out with can provide you with an annual bonus which is calculated by the amount of growth made by your fund in previous years. This bonus cannot be reversed.
The second way that your money will grow is with a terminal bonus. This is a sum of money which will be paid by your provider when your policy has matured. However, this is not guaranteed and will be left up to the discretion of your provider.
Unit-linked schemes
In a unit-linked scheme, you will be given a list of investments that you can choose to put your money into. Unit-linked policies will not guarantee you with any growth on your investment, but there is often a greater chance of a high return.
The Financial Services Compensation Scheme
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