Help! My endowment won't pay my mortgage

Last updated: Apr 12th, 2010
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Q: What should I do with my endowment post-retirement?

We have a mortgage that we took out in 1993 for 20 years. We knew that the mortgage would mature in February 2014 – six months after I retire.

This was to allow a second endowment with Alba (previously Britannia Life) to run long enough to pay off the total borrowed. The first endowment (Co-op) would mature the month before my retirement in July 2013.

In 1997 we remortgaged to enable us to do some home improvements. It now transpires that the current mortgage will not mature until November 2014, a further nine months after the maturity of the second endowment.

I believed the second endowment had been mis-sold and received compensation, and turned that part of the mortgage into a repayment account.

We still have the two accounts running as part-endowment (taken out before we had a mortgage) and part-repayment. As it stands, I don't recall how this has been extended well into my retirement, when my income will not be as great as when I was employed.

Other than 
continuing to pay the fees, are there any other avenues I could explore?

A: Richard Morea, technical manager at London and Country, says:

Endowment policies are designed to run for a term expressed in whole years, as are most mortgage offers. When borrowers move home or remortgage, the end dates will only match if the new mortgage completes on the anniversary of the endowment policy.

Where a mismatch occurs, the mortgage must end last to ensure the endowment policy has matured. If you completed your remortgage in November 1997, a 17-year mortgage term was probably applied, as anything shorter would end before maturity of the second endowment.

When you retire, it seems likely you'll have repaid your endowment mortgage, and the repayment part will have greatly reduced as it nears its last 12 months.

As both the endowment premiums and the interest-only part of the mortgage will have ceased, you may find you can afford the lower monthly repayments, even on a reduced income, or you might be able to repay the outstanding balance from savings or a pension lump sum.

But you should check whether there are any early repayment charges, as these can apply even where the payment is the 
proceeds of an endowment policy.

You could ask your lender to shorten the repayment mortgage term, and while they may charge you a fee, it will give you the opportunity to repay the whole loan prior to retiring. 


Shortening the term will reduce the interest payable but increase your repayments, as you repay the mortgage at a faster rate.

If your lender is unable to help, or you're unwilling to pay a fee, you could make ad-hoc overpayments to clear the mortgage sooner. But check when the best time is to make a repayment, as the lender may only recalculate your balance at a certain point in the year.

Q: How can I sell my endowment?

I have recently looked into selling an endowment policy that I took out with General Accident in 1998.

I've been told that to avoid paying tax on the lump sum I'll receive, the policy must have run for at least 10 years. Is this so, and how do I sell it?

A: Nick Mcbreem, an independant financial advisor at Worldwide Financial Planning, says:

You need to be aware that, while there there may be secondary buyers out there who would be willing to pay more for your endowment policy than its surrender value, I would be very surprised if your plan, which is only 10 years old, would attract much interest on the second-hand market. So you may be forced to surrender it to General Accident.

The proceeds from any cashed-in life insurance policy are usually tax-free for a basic rate taxpayer policyholder, as long as the policy can be classed as a qualifying plan. This means that the plan must have certain features, such as 10 years of regularly paid premiums on a monthly or yearly basis.

As your plan is likely to fit this criteria, then the final qualifying requirement is that the sum assured – the guaranteed amount upon maturity – has to be at least 75% of the total of premiums paid over the plan's life.

However, bear in mind that if you have made any alterations to the plan since 1998 or missed any premiums along the way, then its qualifying status may be called into question.

Before making any decision, contact General Accident and ask for confirmation in writing that your plan does have qualifying status.

You should also be aware that once you surrender the policy the life cover built into it will cease. As the cost of life cover rises the older you get, you might find it hard to get a cheaper policy elsewhere.

Q: Am I entitled to compensation?

I took out an endowment policy with Zurich in 1998, but have been told that it won't reach its target value.

I contacted Zurich, and was offered compensation amounting to the difference between my policy and Zurich's capital investment plan. I have a capital repayment mortgage of £59,000 - am I entitled to more compensation?

A: Richard Morea, technical manager at London and Country, says:

The Financial Services Authority has guidelines on the calculation of compensation. So, provided Zurich followed these rules, you can be confident that its compensation offer is fair.

Any compensation should put you in the position that you would have been in if you had initially taken a capital and interest repayment mortgage, rather than an interest-only endowment mortgage.

The FSA rules state that, when calculating compensation, firms should make two comparisons.

First, the amount of capital you would have repaid if you had taken a repayment mortgage will be compared with the surrender value of your endowment policy. If the capital repaid is greater than the surrender value, then compensation will be due for the difference.

If, however, the surrender value is higher than the capital that would have been repaid, then there will be no compensation due.

Second, your actual monthly outgoings to date will be compared with those that you would have made had you taken a repayment mortgage. This is what Zurich will have referred to in its letter informing you of its final decision.

So, if your outgoings for the endowment mortgage exceed what you would have paid under a repayment mortgage, then this will be added to any loss you may suffer under the first comparison.

However, should the total for the endowment mortgage be less than the repayment mortgage, then the difference will be taken into account when assessing any overall loss.

If Zurich was to make a deduction for lower endowment outgoings, then it must explain its decision to you in writing.

Q: Can I transfer an endowment?

My sister wants to raise some funds for a family celebration for her husband and hopes to surrender her Scottish Provident endowment policy, which has three years left to run.

The policy at maturity would be worth £10,000 plus bonuses, but if she surrenders it early she will only receive £6,100.

As a solution, I would like to take over the policy and put it in my name. Scottish Provident says we have to appoint a solicitor. However, I don't understand why we can't do this ourselves without incurring legal expenses?

A: Francis Klonowski, principal of Klonowski & Co, says:

Unfortunately, Scottish Provident is right. There's no problem in your sister assigning the life policy to you, but a life policy is a legal contract between the insured and the insurance company, so any change of ownership is a legal matter.

However, you could save yourself a trip to a solicitor. For a small fee, you can download the neccesary form, COM337, from netlawman.co.uk.

This is an agreement to assign a life policy or endowment. Often called a 'deed of assignment', it allows the policyholder (the 'assignor') to transfer benefits under their life policy to another person (the 'assignee'). It can be assigned as a gift or in return for a payment.

The assignment does not affect the obligations of the assignor to perform their part of the contract, so they must somehow ensure that the premiums continue to be paid by the assignee.

To be effective, you must notify Scottish Provident of the assignment.

Q: Should I switch my mortgage?

I have 10 years left to run on a £35,000 endowment mortgage which tracks the Bank of England's base rate. My property is currently worth around £170,000.

Would it be sensible to convert this to a capital repayment mortgage over the same term? How easy would this be?

A: Richard Morea, technical manager at London and Country, says:

Converting your endowment mortgage to capital repayment should be a simple task – and it will give you the guarantee that the mortgage will be repaid over 10 years.

Your mortgage lender is likely to charge an administration fee of around £50 for the switch. More importantly, however, there will also be a change in your monthly outgoings.

If you choose the same mortgage term, your monthly repayments could increase by as much as 75% if you decide to keep the endowment policy, so you need to be sure that you can afford the deal.

Although it may be affordable to switch now while interest rates are historically low, when they start to increase you could find yourself committed to much higher repayments than you are able to make.

If that's the case, you could consider either switching part of the mortgage to repayment or keeping an interest-only mortgage and making overpayments.

If you were to keep an interest-only mortgage, you could make voluntary overpayments to reduce your balance. You will be free to vary the over-payments – or even stop them.

But before making any overpayments, check that your lender won't charge a penalty, and will apply them to the balance as and when they are made.

If you switch to capital repayment, you need to decide what to do with your endowment policy. Many policies have been cancelled due to mis-selling or poor performance – but each should be judged individually as performance varies among providers.

But remember, if you surrender the policy you won't share in its performance over the remaining 10 years. And because its future performance is unknown, and as you have already paid the majority of charges within the policy, this will not be an easy decision.

The policy also provides valuable life insurance, which will stop if it's cancelled. So, if you have dependents, you should consider replacing this.

However, if you switch to repayment and keep the endowment policy, any proceeds upon its maturity will be paid to you tax-free.

Q: How can we increase our endowment value?

Our endowment company has sent us a letter stating our endowment will not achieve the money we borrowed on our mortgage. Could you advise on how to increase its value?

A: Caroline Hawkesley, a certified financial planner and director at Evolve Financial Planning, says:

You have a number of options. One is to increase the payment you make into the endowment, although my view is you can get better net returns elsewhere. An individual savings account is more tax-efficient than an endowment, for example.

So the second option could be to 
save some extra money each month into a stocks and shares ISA, on the basis that the combination of ISA and endowment should pay off the mortgage.

A further option is to look at the fund choice within the endowment and see if you are able to switch funds. Some endowments offer this, but others are restricted to the insurance company's with-profits fund.

Taking more investment risk might increase long-term returns, but of course there's no guarantee.

If you have an interest-only mortgage, you could also consider switching to a repayment deal. Speak to your lender to see if there would be a charge or penalty for doing this, and find out what the new monthly payment would be.

Even if you don't want to switch, there may still be a facility to make penalty-free, one-off payments into the mortgage, which will help reduce the amount you owe.

Q: How will low interest rates impact my endowment?

I have an endowment policy with the Prudential, which matures in 2013. In November 2008 I received a letter saying my endowment was on target to pay the mortgage.

Will the new lower interest rates have an adverse affect on my endowment reaching target?

A: Richard Morea, technical manager at London and Country, says:

The short answer is no. Whether your endowment policy reaches its target amount on maturity is dependent on Prudential's investment performance, not interest rates.

However, the reason interest rates have fallen so steeply is that we are experiencing a global recession, which is likely to affect most companies' performance.

Depending on the type of endowment you have, you may have the facility to change the fund in which your money is invested. Switching funds gives you the opportunity to choose a more secure fund, or look for one that offers the potential for greater returns, although this usually means greater risk.

However, you should seek advice from either your financial adviser or Prudential before making any changes.

If, having taken advice, you are still concerned that the performance over the remaining four years may not be sufficient to repay the mortgage, then you should look at making provision for this as early as possible.

Your choices will include increasing the contributions you make to the endowment policy; saving a regular amount into another investment such as an ISA; or making overpayments on your mortgage or converting part of it to repayment. Once again, however, you should seek advice before making any decision.

Q: Is now a good time for an endowment?

In recent years endowment mortgages have had a bad press. But with the current state of the economy, is now a good time to get one?

Surely, for the next 15 to 20 years, the only way is up, and endowment mortgages should begin to look very attractive?

A: Richard Morea, technical manager at London and Country, says:

Endowments have had a lot of unfavourable press over the past 10 years or so, predominately over mis-selling, but also relating to poor investment performance and unrealistic expectations of future returns.

Regardless of whether the endowment is on target to repay a mortgage, or was sold appropriately, the main risk is that it doesn't guarantee to repay the loan, unlike a repayment mortgage.

The main arguments against taking out an endowment policy to repay your mortgage now, however, are the lack of policies available and the more attractive features of other investments such as individual savings accounts.

Given the lack of consumer demand for endowments and the development of alternative investments, many life offices have stopped offering new policies. This means that choice will be limited.

More importantly, the lack of flexibility and high charges within an endowment policy are major drawbacks, and they have encouraged prospective policyholders to use other investments such as ISAs as their mortgage repayment vehicle.

ISAs have therefore largely superseded endowments as the vehicle used to repay an interest-only mortgage, as they provide greater flexibility and better access to funds than endowments.

In addition, they are likely to have lower charges and enjoy better tax treatment than endowments, especially during the early years, while still having the same underlying investments.

It makes sense to take a medium to long-term view for any investment, and it's particularly necessary where the policy is being used to repay a mortgage. The performance over that period will vary, but it's unlikely to be all plain sailing.

Your Comments

Advice please,

I have a small endowment mortgage (£25000) which completes at the end of August 2010. However the endowment which is supposed to cover this amount does not mature until the end of November 2010. My mortgage company are being vague about what action I should take and mention 'available products' at the mortgage end date.

Any ideas what i should do to cover this mismatch of dates ? I do not have the cash to cover the 3 month gap.