Endowments are still the most popular form of investment used to pay back an interest only mortgage. They are essentially an investment product designed to generate sufficient funds to pay back the loan at the end of the term, or earlier if you die.

As with other interest-only mortgages, you pay interest to the lender on the full amount of the capital for the entire duration of the loan term. The remainder of your monthly payment goes towards a premium for an endowment policy.

A portion of this premium is invested into some form of fund that is eventually used to pay off the capital owed to the lender. At the beginning of the policy, the provider will make some assumptions about the growth rate of the investment. There are often a variety of different assumed rates of growth for you to choose from. The rate is used to calculate how much your repayments need to have enough money to repay the loan at the end of the term.

Whether or not your repayments will actually be enough to reach the level of your loan is not normally guaranteed. However, with good fortune and skilled management, hopefully the investment will grow faster than the projections used when the loan was taken out, thereby leaving you with a cash lump sum at the end of the term.

The size of the premium is affected by the growth rate by which your fund is expected to grow. The higher the assumed growth rate, the cheaper the premium - you are relying more on favourable market conditions and the prudent investment skills of the fund managers than on the amount of money you pay in. However, a higher assumed rate of growth brings a greater risk that the investment objectives will not be reached.

If the assumption is that the growth will be slower, your premiums will be more expensive, as you must contribute more money to compensate for the 'probable' inferior rate of growth. But to compensate, this brings a greater likelihood that your fund will exceed the performance necessary to repay the loan at the end of the term. If this is the case, then there will be a cash surplus left over, which you can keep - with no tax to pay! Given the experience of the last decade, which has seen some advisers underestimate the amount of funds needed to generate sufficient money at the end of the term, it is probably always best to err on the side of caution.

Not all of the premium goes towards the investment side of things, as a portion of your monthly payment is used to pay for a life assurance policy that is designed to ensure the full amount of the loan is repaid if you don't survive to the end of the repayment term. Life insurance is an integral part of the endowment product, not an optional extra. You cannot have an endowment without the life assurance element. If you really don't want to pay for life cover, don't get an endowment.

With an endowment policy, the length of the repayment term is fixed and cannot usually be altered. You can take the endowment with you if you move to a new home, though you may need to top up the payments if you add additional borrowing to your mortgage. You can keep on raising the amount you pay into it each time you trade up to a more expensive house. You are not usually required to show any further evidence of health to increase the cover on the life assurance element of the endowment.

Another useful facility, which can generally be arranged as part of the endowment, is a waiver of premium. This is the option to have your premiums paid by the life office in the event that you cannot work because of illness or accident. It works very much like an income protection policy. This does not come as standard with an endowment and costs extra.

There are various different types of endowment, the main types of which are summarised on the following pages.