The enthusiasm of certain banks for endowment-linked home loans has become a lot more muted since current market conditions show it is an expensive option that benefits banks more than their clients.
Many people bought this product because their banks persuaded them it was the best way to finance their bonds.
The basis of the sales pitch was that if you took out an endowment policy linked to your home loan and paid back only the interest on your loan together with the premiums on the endowment, at the end of your mortgage period you would have enough to redeem the capital from the proceeds of your endowment policy.
The winners were clearly the banks, who maximised the interest paid, and life assurance companies.
An example of this type of cross-selling was an alliance signed between Standard Bank and Liberty Life in the late 80s which clearly benefited both companies.
The scheme was marketed by Standard Bank Financial Services. The bank made profits as its home loan book grew and Standard Bank Financial Services earned commissions on the product.
But high bond rates, high inflation, soaring interest rates and mediocre returns on endowment policies soon showed that many people would not have enough money to repay the capital.
Bonus rates on endowment policies would, over time, have to exceed your bond rate for this product to be worthwhile. Liberty's bonus rates did not.
Today, Standard Bank, NBS and Absa say they are still selling endowment-linked mortgages, but are not actively marketing them.
Yet, Personal Finance has learnt of a home owner who was offered an endowment-linked mortgage loan through Standard Bank only three years ago.
It was offered to her as an attractive option after she expressed an interest in buying life assurance. Standard Bank insisted the policy be ceded to them.
The home loan interest rate was about 16 percent. Since then, it has soared and she's literally lost thousands because she is not reducing the capital amount she owes the bank.
The word from Standard Bank today is that endowment-linked policies clearly require much higher cash-flow to repay the capital on a bond than in the case of a normal reducing mortgage.
With broker commissions and policy initiation costs on endowments, Standard Bank says it takes about three years before the endowment policy shows attractive returns after tax.
It is now advising clients to opt for normal reducing mortgage loans and to pay more than the monthly instalment.
This way you earn an effective rate of return on the additional payments at the home loan interest rate, without any liability for tax.
Other banks that no longer recommend this product to ordinary individuals are NBS and Absa.