Shall I surrender my endowment policy to pay off my mortgage?

3 March 2014

Q

I want to buy a house at the same time as maintaining a small mortgage of £21,000 on a house I am trying to sell. I have a 25-year endowment, which has four years left to run and a surrender value of £29,000. Should I surrender the endowment to pay off my £21,000 mortgage and then arrange a mortgage for the new property?
From
MB/Stoke on Trent

A

Thankfully, your decision as to whether to cash in your endowment has not been triggered by the more common concern that the policy will fall short of the target amount and fail to pay off the mortgage balance.

However, although you are in the position of being able to surrender the endowment now and pay off the mortgage what you can't know is whether that will prove to be the right decision, as we don't know how the policy will perform in the remaining four years.

You won't know whether there could be a worthwhile terminal bonus, although you could look at your policy provider's record to assess the chances. Surrendering the policy would cut out the remaining monthly premium payments and reduce your mortgage interest going forward.

However, you would also lose the life cover from the endowment so consider how easy that might be to replace.

The decision to surrender may be unnecessary to purchase the new property in any case. Even if the sale and purchase will not be simultaneous you may still be able to keep the current mortgage, as long as you can meet the new lender's criteria.

If your income will be adequate to support both mortgages, then you could take a mortgage on the new property and repay the current mortgage from the proceeds of sale.

What is an endowment?

In recent years, endowment mortgages have come in for severe criticism because of a mis-selling scandal that resulted in homeowners seeing shortfalls in their final repayment figures due to years of falling values.

Many policies were sold in the late 1980s, with people eager to get onto the property ladder for the first time taking out interest-only mortgages and choosing endowment policies as their repayment plan.

People would then use the endowment - which was normally invested in stocks and property - to repay the capital of the mortgage and be in line for a sizeable lump sum as well.

But many people have been left with a shortfall, meaning the investment hasn't even covered the cost of their mortgage, let alone allowed them to claim a lump sum.

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