Monday, February 26, 2007

Should I buy an endowment policy to pay off a mortgage?

Dear Mr. Tan Kin Lian, Sir.

I have a query about endowment mortgage. The endowment is a European-originated Endowment 65 policy (maturing at 65 years old).

As I understand, with an endowment mortgage only the monthly loan interest is paid, and the loan itself will be paid off with the endowment's maturity payout.

What is your view of this product?


My reply:

Generally, an endowment policy gives a lower return compared to the interest rate that you have to pay on your mortgage. It is better to make a monthly repayment towards your mortgage, instead of investing in an endowment policy.

In some European countries, there is a tax advantage when you buy an endowment policy. With the tax savings, the net return on the endowment policy may be better than the interest on the mortgage. In such a case, it make sense to take an endowment policy to repay the principal sum on maturity.

This type of situation does not apply in Singapore.

There are many drawbacks of investing in an endowment policy, especially in a foreign country. You should avoid it, unless you are very clear about its implications.

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