Which statement best describes monthly instalments in an endowment mortgage?

Which statement best describes monthly instalments in an endowment mortgage?

• A. Interest payments only
• B. Principal repayments only
• C. A fixed mix of principal and interest
• D. Payments unrelated to the loan

Answer: (A)

In an endowment mortgage, the monthly payments are designed to cover only the interest on the loan. The principal loan amount is not reduced by these monthly payments because the borrower relies on the endowment policy to accumulate enough funds to repay the loan at the end of the term. So the instalments being paid each month are interest-only, while the endowment policy is intended to provide the principal at maturity. If the endowment fund does not grow enough, a shortfall may need to be met from other sources. The other patterns—paying principal only, a fixed mix of principal and interest, or payments unrelated to the loan—do not describe how endowment mortgages are typically structured.

In an endowment mortgage, the monthly payments are designed to cover only the interest on the loan. The principal loan amount is not reduced by these monthly payments because the borrower relies on the endowment policy to accumulate enough funds to repay the loan at the end of the term. So the instalments being paid each month are interest-only, while the endowment policy is intended to provide the principal at maturity. If the endowment fund does not grow enough, a shortfall may need to be met from other sources. The other patterns—paying principal only, a fixed mix of principal and interest, or payments unrelated to the loan—do not describe how endowment mortgages are typically structured.