DEFINITION of 'Endowment Loan'

A type of mortgage in which the borrower makes only interest payments on the mortgage, while payments that would have gone to repay the principal are instead funneled into an endowment fund. Under an endowment loan, the borrower does not repay the principal until the mortgage expires.

BREAKING DOWN 'Endowment Loan'

Endowment loans offer many incentives for borrowers, however, they can be riskier than traditional mortgages. When repaying an endowment loan, borrowers have a lower monthly payment, since no principal is being repaid. During good economic conditions, contributing to the endowment fund allows the borrower to earn interest on money that would have been repaid as principal.

The main risk with an endowment loan is derived from investing in the fund. Because no principal is repaid during the life of the mortgage, the borrower must rely on the investments performing well. If the fund loses value, the borrower could lose much of his or her investment in the endowment fund, but will still be required to pay the full mortgage amount.

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