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.
An additional bonus added to a with-profits policy when it comes to the end of the term specified at the outset and “matures”. The terminal bonus is paid as a percentage of the final payout and is at the discretion of the life company and are not guaranteed and the rate changes from year to year depending on the return from the with-profits fund. In some cases, the terminal bonus accounts for half the maturity value of the policy.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
A contract written by a life assurance company to pay a fixed sum (“the basic sum assured”) to the assured person on a fixed date in the future or to their estate should the person die prematurely. The policies normally run for five, 10, 15, 20 and 25 years. Monthly premiums are calculated on the age of the life insured, the basic sum assured required at maturity and the length of the policy, so each policy is unique. The policies can be with-profits or unit-linked (see separate entries). A common investment product during the 1980s, endowment policies were sold alongside interest-only mortgages and designed to provide enough money to repay the capital borrowed at the end of the mortgage term. However, mis-selling scandals and poor investment performance discredited endowments as a mortgage repayment method.