Endowment Guide
Endowments have become increasingly controversial
and discredited in recent years, yet many homebuyers still take one out to repay
their mortgage. Here we explain the key issues for borrowers:
What are endowments?
An endowment is an insurance policy that pays out
a lump sum at the end of a set period or on death, whichever comes first. They
are complex products that combine life assurance investment growth in one
package. These types of policies are most commonly utilised as a way of
repaying a mortgage.
How do they work?
With an endowment mortgage, you do not repay any
of the capital you borrow during the term of the loan. Instead, the endowment
policy should grow to produce a lump sum large enough to repay the loan in full
at the end of the pre-agreed period, normally 25 years. Your monthly payments
are made up of interest on your mortgage loan and the premium for the
endowment. Within the package you also pay for life assurance which will repay
the loan if you die.
What is the big drawback?
There is no guarantee your endowment will pay off
your mortgage. Shortfalls have become a fact of life for an increasing number
of policyholders. This is not the case with the traditional capital and
interest repayment mortgage method.
What is the point of an endowment then?
An endowment might grow to more than you need to
repay your loan, so giving you a bonus to spend on anything you like. But the
world has changed dramatically against endowments so this is far less likely to
happen nowadays. When endowments first became popular, in the early 1980’s,
inflation was roaring, interest rates were high and you received tax relief on
premiums paid into an endowment policy. So the sums worked in favour of
endowment mortgages, they looked like great ways to repay home loans.
What has changed?
Tax relief on endowment premiums vanished years
ago and inflation and interest rates have fallen hitting investment growth.
Many people are finding that their endowment policies won’t produce enough to
repay their loans after 25 years, let alone produce the hoped for surplus.
So I need to keep paying the premiums?
You must seek our independent advice, as this
will depend on the type of policy, the stage it is at and the potential
penalties for cancellation. On average around half of the total payout on an
endowment comes on the very last day. This is due to a so-called terminal
bonus, which is not guaranteed. A terminal bonus is a final bonus an insurance
company may pay to an endowment policy on the very last day of the plan which
distributes a share of the profits made by the insurance company. It is
important to note that this bonus is not guaranteed to be paid. Stop paying in
before the very last day and you are likely to lose this. Instead, you will get
the benefit of only the annual – or reversionary bonuses added to your policy.
What if my endowment policy provider tells me it
is not growing fast enough to repay my loan as planned?
Hundreds of thousands of people have been told this recently.
Often people are advised to make extra monthly contributions to the endowment
policy, though this can feel like throwing good money after bad. If your
endowment provider says you need to pay an extra £50.00 a month for example, you
could pay it into an Individual Savings Account, (ISA), which offers tax free
interest on contributions, subject to limits. This would help meet any possible
shortfall at maturity of the endowment or you could restructure the mortgage and
place part of the loan on a capital and interest repayment basis, thereby,
ensuring part of the loan is being repaid gradually over the remaining term of
the mortgage.
You should
seek independent financial advice to find out the most suitable course of action
for your circumstances.
I have received a shortfall warning from the
provider of the endowment?
Insurance companies have written to policyholders
warning if their endowment policy is projecting a shortfall in value at maturity
of the plan. This has taken the form of a traffic light warning system,
whereby, red is for a significant shortfall, amber is for a shortfall and green
is for no shortfall. You may receive a letter like this which is reminding you
to take action. Please contact us to receive independent advice before making
any decisions to ensure you make an informed decision after discussing your
individual circumstances.
Do I need independent advice regarding my
endowment?
Yes – it is vital that you review your endowment
policies to ensure that any potential shortfall, is acted upon as early as
possible. In this way it gives you more time to put in place alternative
measures to ensure you do not have to pay a lump sum from your own savings to
your mortgage lender when they ask for their loan back at the end of the term.
Please contact us to arrange for an
independent review of your endowment policies to ensure you have the peace of
mind in knowing you have taken action now.
Your home may be repossessed if you do not keep up repayments on your mortgage.
We can
either be paid commission by the lending institution or charge a fee for
Mortgage Advice. The amount of the fee will depend on your circumstances,
typically 0.5% of the loan amount. | 
R.J.
Nash
Consultancy Ltd
