Norwich Union warns of 90% mortgage endowment shortfalls
Norwich Union has warned that over 90% of its mortgage endowment with-profit funds may be in shortfall when they mature.
The company has placed 90.3% of its mortgage endowment funds on shortfall alert meaning that they may not hit target when they mature - leaving holders potentially unable to pay off their mortgages. This shortfall is up slightly from 89.5% last year.
The majority of the mortgage endowment funds that are unlikely to hit target will mature over the next 10 years.
Norwich Union's with-profits bonus announcement published on 15 January also reports an overall return of 5.4% on its former Commercial Union products, down from 11.9% in 2006 and 17.7% in 2005.
Elsewhere, its investment bond, savings endowment and pension policy all saw an increase in returns for funds maturing on 1 January 2008.
With-profits funds are controversial because returns are held back in the good years in order to subsidise the bad years.
They include endowment mortgages, which work by investing your repayments in order to eventually produce a lump sum large enough to repay your debt. Although these were popular in the 1980s and 1990s, shortfalls mean that many people may be left unable to repay their loans.
Nick McBreen, an independent financial adviser at Worldwide Financial Planning, says Norwich Union’s results should be a wake-up call to endowment mortgage policyholders to take action.
He adds: “It is clear to me that with-profit funds have never provided value for money."
But he does offer some recommendations: "Endowment policyholders should see an independent financial adviser or mortgage broker now to see if they would be better off remortgaging. They should also consider cashing in their policies and investing the money in their mortgage repayments or in another type of investment like a unit-trust.
“Or if they decide to hold onto the policy, then at least stop throwing good money after bad and invest in something that will actually offer good returns.”
Norwich Union has a mortgage endowment promise to help people who, at the time of the announcement in 2000, had a shortfall on their endowment policy.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Issued by life companies and designed to produce medium- to long-term capital growth, but can also be used to pay income. The minimum investment is typically £5,000 or £10,000 and your money is invested in the life company’s investment funds, so the bond can either be unit-linked or with-profits. They offer a number of tax advantages, such as the ability to withdraw up to 5% of the original investment amount each year without any immediate income tax liability. Also, a number of charges and fees apply, such as allocation rates, initial charges, annual charges and cash-in charges. As investment bonds are technically single-premium life insurance policies, they also include a small amount of life assurance and, on death, will pay out slightly more than the value of the fund.
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.