UK - Endowment Policies Create Unique Real Estate Opportunity For Investors And Consumers

An interesting situation is emerging in the UK that could create unique real estate opportunities for investors and consumers alike.

In the UK real estate market, mortgages were sold called “endowment mortgages”. Endowment mortgages are mortgages where the interest on the principle of the mortgage loan is due. The principle of the loan is covered by a type of insurance known as an endowment policy. The endowment policy ensures the mortgage holder will be able to pay off the loan when it comes due. I think we in the states may call these “balloon” mortgages.

An endowment is an insurance policy where the policy holder must pay monthly premiums to guarantee that the loan will be paid at the time specified. Endowment policies issued in the 70’s and 80’s were thought to be able to pay off the mortgage loan completely. Unfortunately, for a number reasons, many of the endowments are plagued by a shortfall. That is, they won’t pay enough to cover the mortgage amount coming due.

Some people realizing this, choose to escape the looming liability by selling their policy.

Investors know that they’ll end up owing money at a certain time in the future, but they can either cover it because it’s worth it to them or they speculate the properties will grow in worth.

Some consumers - eager to escape the liability - were “taken” and not paid as much as they might have been for their equity in the property.

The UK government regulators stepped in with legislation to protect consumers by informing them that they may be able to get a higher value for their years spent paying premiums by using an endowment policy selling service. These agencies often do a better job marketing the potential endowment, increasing the consumer’s cash position by as much as 35% more than they might obtain on their own trying to sell endowment policies they might be party to.

So do you see the opportunity?

Some people are being forced to sell because the endowment policy they THOUGHT was protecting them basically fizzled out. (Probably they were based on lower interest rate and inflation assumptions).

That means home buyers and/or investors might be able to find bargain properties if they have the wherewithal to step in and help.