Endowments
This type of endowment, sometimes known as a 'full endowment' is a form of life assurance policy taken out in conjunction with an interest only mortgage and allows you to pay monthly premiums which remain the same for the entire term of the loan. When the mortgage term expires and the balance becomes due you receive a tax free lump sum payment which is used to pay off your mortgage. In the past many of these endowments have performed well and have produced a sum, or surplus, which is greater than the mortgage balance to which you are also entitled, tax free. However, since these full endowments provide guarantees relating to performance, they are extremely expensive.
Low Cost Endowment
Not to be confused with a full endowment. There are no guarantees offered with this type of endowment and this type of repayment vehicle relies strictly on the performance of the investments. There is usually a 'terminal bonus' at the maturity of the policy in order to make sure that there is enough money to pay the outstanding mortgage. It does feature a built in life assurance policy so that your mortgage will be paid if you die before the term of the loan expires.
Unlike the full endowment, it is the lack of a guarantee of the return on investments which makes this a 'low cost' endowment. Unfortunately, many people (typically older retirees) recently have been caught out with this type of repayment vehicle (recommended to them by their own mortgage lenders more often than not), causing them stress and anxiety through fear of not being able to pay their mortgage off.
Check these policies carefully if you are considering them and if there's anything you don't understand get some independent financial advice.
ISA
Another form of repayment vehicle for interest only mortgages, the ISA mortgage was introduced relatively recently (1999). They work in a fairly similar manner to endowments in that investments are made into an ISA or Individual Savings Account by the fund managers. As with endowments there are no guarantees of performance of the investments so the value of the fund may increase or decrease depending on the market.
