There has been a huge scandal over the mis-selling of endowment mortgages and some people fear that Interest-only mortgages could go the same way.

In a nutshell, endowment mortgages combine an interest-only home loan with a stock market investment an endowment policy.

Back in the 80s and 90s, they were heavily promoted as a sure-fire, low-cost way to pay off the capital part of a mortgage debt.

The idea was that the endowment would mature at the end of the mortgage term, providing the necessary cash plus a healthy surplus for the policyholder to enjoy as they wanted.

Unfortunately, poor stock market returns meant the majority were left with policies that wouldn’t clear their debt, let alone provide the promised extra cash.

Many have since claimed compensation on the basis that the salesperson they bought from failed to explain that this could happen.

For more on endowments, read The The endowment mortgage and What went wrong with endowments?

So what’s the problem today?

Back in the heyday of the endowment, mortgage lenders would at least check that a borrower had a policy set up to act as a repayment vehicle for their capital debt.

Nowadays, most don’t bother and this means interest-only mortgage holder could be exposing themselves to even greater risk.

For those who do the sensible thing and organise a repayment vehicle, there is the chance that this won’t perform well enough to clear their debt.

And for those on an especially tight budget, there is the temptation to keep costs down by putting off saving to repay the capital debt.

But the longer they leave it, the harder it will be to save enough.

In either case, anyone who gets to the end of their mortgage term and finds they can’t repay the full amount of capital they owe, may have to sell their home to avoid having it repossessed.

Things to Consider

Some people think they won’t ever be able to get on the property ladder unless they take the interest-only route.

But it’s a fallacy that interest-only loans are cheaper.

They may be less expensive than comparable repayment (capital and interest) mortgages in the short term if you don’t put money away every month to repay the capital.

But in the long run, as well as having to find the cash for this, you will pay considerably more interest.

For more on this, go to The true cost of an interest-only mortgage

Read on about Interest-only Mortgages