Should I pay off my endowment mortgage?

admin
28 July 2014

Q

I have an endowment mortgage of £44,000 at 0.68% above the Bank of England base rate, so I only pay £25 a month interest on this. I plan to pay this off with a Standard Life with-profits plan that matures in May 2019 and is currently worth around £31,000. I make regular savings of £75 a month into an LV= with-profits Isa, which is currently worth about £9,000, and I also have 1,224 shares in Standard Life worth around £4,800. I also have £11,000 in a Halifax Isa. Should I pay the mortgage off early as the plan value, my Isa and the value of the shares would be sufficient to do so? I would save about £1,500 in interest over the five years and around £5,700 in contributions to the Standard Life plan but lose the joint life cover of £67,000 I have with my wife and the dividend payments I get from Standard Life and any growth in the fund's value. Also, Standard Life says I would be entitled to a Mortgage Endowment Promise at maturity, which could be higher than £2,862 or lower than £4,295 - it could be nil. If I do nothing, the Standard Life plan would be almost enough to pay the mortgage off and then I would still have my shares and LV= Isa money. What are your thoughts on my current financial situation?
From
KB/London

A

If the mortgage is base rate plus 0.68%, that would suggest your interest rate is currently 1.18% a year, giving a monthly interest cost of around £43. It may, therefore, be that your mortgage rate is base plus 0.18%, which would give a 0.68% overall interest rate and a monthly cost of around £25. Either way, you have an extremely attractive interest rate.

The fact that you are in with-profits funds makes life a bit more complicated but if you compared 0.68% or 1.18% with the returns you and your wife could get in a cash Nisa – remember that you now have an annual Nisa allowance of £15,000 - you could get a higher tax-free return on a cash Isa.

Therefore, even if you were to cash in the investments, you could get a better return on a cash Isa until your mortgage actually needed to be paid off.

Regarding the Standard Life shares, our view is that it is very risky to hold individual shares. You would need dozens of individual shares to have any sort of meaningful diversification. With any share, while there is a chance for substantial gains, the same goes for potential losses.

Much depends on your attitude to risk and your wider financial position but there is an opportunity to take some risk off the table by selling these shares.

Get help finding the best mortgage for you

With-profits

The theory behind with-profits funds is not a bad one – the long-term benefit of asset-backed investment but without the volatility and with an element of downside protection.

The reality, however, is different because these are such opaque investments. Sadly, this opacity makes it very difficult to decide on what to do with such investments, particularly when there are surrender penalties involved or where the insurer is applying a "market value reduction" and where you have no idea of what, if any, "terminal bonus" there might be.

This opacity is highlighted when you say you could get an extra £2,862 to £4,295 at maturity but it could be nil. It is impossible to make a mathematical decision when insurance companies present us with such a wide range of variables.

The upshot of it all seems to be that you have the potential for some quite nice returns between now and May 2019 with a fair amount of downside protection, too.

Even if in the end the endowment returned very little over and above what you paid in between now and May 2019, it doesn't seem like you have much to lose by sticking with it, given your very low mortgage interest rate.

You should also look into the bonus history of the LV= Isa. Find out what its stance is on annual versus terminal bonus, what surrender penalties there may or may not be, and then make a call as to whether to continue with it.

Jason Witcombe is an independent financial adviser at Evolve Financial Planning

[Video:1]