Are endowment mortgages still a good idea?

Q: We took out an endowment mortgage (90% insurance and 10% capital) of £31,500 through NatWest in 1992, based on an expected return of at least £39,000. The mortgage plan was taken out with a target of £28,000. (There is a guaranteed maturity payment in August 2012 to cover the £3,500 difference and provide a small benefit.)

Having seen several years of falling value on the 'final payment figure', our mortgage was adjusted in May 2004 to include a £10,000 repayment element (completion May 2011) to cover a predicted shortfall of £9,000.

At about this time, the policy was taken over by Zurich from Eagle Star. We've now been informed that our projected final amount will be £19,300 – a shortfall of £8,700 on the 'guaranteed' figure and nearly £20,000 on the minimum projected figure.

As the mortgage was for more than the plan's target figure, we've calculated we'll be facing a shortfall of at least £5,500. We've looked at selling our endowment in advance but can't find a group that deals with Zurich. Also our 'cash in value' currently stands at £16,912 (August 2010) compared with £16,118 in August 2001. What do you advise?

A: David Hollingworth is mortgages expert at London & Country Mortgages in Bath

There are a lot of figures here, but ultimately you only need to focus on a couple of them, namely how much you owe on the mortgage and how much you might get from the endowment. The problem with endowments falling short of the target is down to the investment simply not meeting the projected rate of growth used when the endowment was taken out.

You've done the right thing in keeping a close eye on the situation, and have already taken some action to remedy the potential shortfall by switching £10,000 of your mortgage to repayment. However, it looks like there is still some movement in the shortfall amount. If you do get £19,300 from the endowment, and as you'll have repaid the £10,000 repayment portion of the mortgage, the shortfall will amount to £2,200 at the end of the mortgage term.

You have various options as far as the endowment goes. You could keep it and look to meet any shortfall from savings or by switching more of your mortgage to repayment. Alternatively, you could cash in the endowment or look to sell it and again switch the remaining mortgage amount to repayment.

If the policy is with-profits, then you may benefit from the payment of a terminal bonus when the policy matures, although there's no guarantee what that will be.

It sounds like you've already investigated selling the policy, which will often give a better return than ending it early. However, you've had no luck, which could indicate that it's actually a unit-linked policy. With a unit-linked policy, the monthly payment buys units in the underlying fund and the life cover. These units will fluctuate in value over the term of the policy, dependent on the performance of the investments. They are therefore unlikely to carry a value on the traded endowment market.

If you do think about surrendering the policy, remember to factor in the life cover that the policy provides, as it may be difficult to replace and more expensive (the older you get the more expensive life insurance is).

Finally, it does seem strange that the target amount on the policy was less than the original mortgage amount, so you might like to query that with the firm that originally sold you the policy.

Are endowments still a good idea?

Over the last decade, endowment mortgages have come in for a bit of a bashing – this was mostly down to mis-selling, with customers not fully aware of the product they were buying. Many didn't realise that their endowment was a share-based investment and wouldn't necessarily cover the full amount of the mortgage.

However, regardless of how endowments have been sold, poor investment performance has also further undermined optimistic expectations on future returns.

The main problem with an endowment mortgage is that even if it appears on target to repay the mortgage, there's no guarantee that come the end of the loan term the mortgage will be cleared, unlike a repayment mortgage.

As they're no longer popular vehicles to repay a mortgage with, although it's still possible to buy an endowment policy, they are not widely sold anymore. Other investment products like ISAs are proving more attractive to customers because they are easier to access, offer lower charges and tax relief.

Your Comments

I took out a 25 year endowment mortgage about 40 years ago. The Guaranteed sum was to cover the mortgage repayment whilst any bonus was exactly that. After five years I moved house and renewed the mortgage,effectively starting a new 25 years. By some actuarial quirk and instead of being charged an admin fee this resulted in me receiving a cashback adjustment, (about £200 as I recall), much to my pleasure and the total bemusement of my agent. Some years later this was compounded by both the Building Society and the Insurance company de-mutualising and awarding me shares. Finally the endowment matured with a 150% bonus after paying off the mortgage.  It made all those early years of struggling to pay monthly costs worthwhile.
It now appears that the idea is that guaranteed sum plus projected bonus should be enough to pay off the loan. A gamble which in recent times seems to have failed with bonuses failing to achieve expected levels.Even worse it appears that "guarantees" are not being fully honoured.