Interest Only, Endowments and Endowment Shortfalls
This section covers things that we believe will be of interest to you in connection with interest only mortgages that you arrange to have repaid by an endowment.
It covers an introduction to how they work, the risks and what to do if you have a shortfall.
1. What Is An Endowment Mortgage?
When you take out a mortgage it will either be on an interest only basis or a capital and interest repayment basis. With an interest only mortgage, your monthly payments to your mortgage lender only cover the interest on the loan. The payments you make do not repay any of the loan itself. Therefore, so that you can repay the loan at the end of the mortgage term people generally take out a separate savings scheme to build up a lump sum. This lump sum can be used at the end of the mortgage term to repay the loan. Many people have taken out endowment savings policies for this purpose but may have taken out PEPs, ISAs or pensions to do the same job instead.
If you have a capital and interest repayment mortgage, payments to your mortgage lender are made up of interest on the loan and also gradually repay the whole of the amount you borrowed. This means that the loan will definitely be repaid by the end of the term. If you have this type of mortgage but also have an endowment policy, don't worry. Your mortgage will be repaid anyway and you won't need to use the money built up in the endowment policy to do it.
What Does An Endowment Do?
By saving every month into an endowment policy you build up a lump sum of money that is paid out when the policy matures. This is generally set for the same time as when your mortgage finishes. An endowment policy includes life insurance and may provide other insurance benefits, as well as building up a lump sum. The lump sum paid out is generally not guaranteed and depends on investment returns. It also depends how the endowment company has invested your savings. The company usually puts most of your savings into investments linked to stocks and shares. Over the longer term these tend to provide good returns but like all stock market investments, they do tend to involve some risk.
Why Might Some Endowments Not Repay Mortgages?
When you take out an endowment mortgage the company whose name is on the endowment policy must give you written examples of what you might get back if investments grow at different rates. Projection rates are laid down by the industry regulators and all firms must use them. Since July 1999 the projection rates have been lower due to falls in inflation and interest rates and are 4%, 6% and 8% a year. The projection rates show how your endowment could grow if the projections come true.
There are no absolute guarantees that any of the projected rates will come true. It is common for firms to base their projections on 6% at the moment. Remember, there is no guarantee that 6% investment growth will be achieved. Due to the fall in interest rates and inflation, investment returns have been lower. This is why some endowments might not be on track to pay out a big enough lump sum at the end to repay your mortgage in full. Don't forget, because interest rates and inflation have reduced, you will have been saving money on your mortgage, loan unless you have a fixed rate mortgage.
2. What To Do If You Are Worried About Your Endowment.
What if you have received a red letter warning of a shortfall?
If you are worried that your endowment might not pay off your mortgage there are some things that you need to do. DO NOT CASH IN YOUR ENDOWMENT. DO NOT STOP PAYING YOUR PREMIUMS. If you do, you could be getting poor value for money and you could also lose valuable life insurance.
Firstly, find out your mortgage and endowment paperwork. Make sure that the mortgage and endowment finish at the same time. If the mortgage finishes before the endowment you could have a problem. If this is the case you should contact the people who advised you and ask why the dates are different. It may be possible for your mortgage lender to extend your mortgage term but it will mean paying more interest. You also need to make sure that you can afford the payments if your mortgage and endowment go past your retirement date.
Secondly, ask your endowment company if your endowment is on track to repay your mortgage. Many people are currently receiving projection letters to tell them about progress. If you have not received a letter get in touch with the company as soon as possible. Remember, even if you get a letter or are told that your policy is on track to repay the loan, this is based on 6% growth being achieved by your endowment. You must always be aware that this is only a projection and investment returns may not be at that level. You must be prepared to track your endowment's progress and make any changes necessary.
If it seems that the lump sum you could get from your endowment might not pay off the mortgage you need to take action. Some of the options are:
Increase your monthly savings to the endowment. Check whether there are extra cost and charges and whether the extra savings may mean you paying tax on the lump sum you get at the end. These are called 'Qualifying Rules'.
You could extend the term of the endowment and/or mortgage as long as the lender and endowment company agree and you can still afford the premiums, especially if this is after you have retired.
You could take out an additional endowment policy or start saving extra money into a different savings plan.
You could try and move part of your mortgage from interest only to capital and interest repayment. This could be beneficial if you have say, a £10,000 projected shortfall on your mortgage. By putting £10,000 of the loan onto capital and interest repayment, the endowment should pay out enough for the rest of the interest only mortgage.
If you have some spare money you could pay a lump sum off your mortgage. Remember to check if your mortgage lender would charge you for doing this.
Rather than cashing in your endowment you may be able to sell it for more money. This may be enough to pay off your loan. You could also use it to reduce your loan and move the balance onto capital and interest repayment. Remember that if you wait until the endowment matures you could get more money than selling it now. This all depends on the type of policy you have and what your views are.
As you can see, there are many options available and you should not panic. Help is always available. If you are unsure which route is best for you, please get in touch with us for advice.
3. Endowment Mis-selling Complaints
What About Endowments That Were Mis-Sold?
It is a fact that some people were sold endowments and should not have been. This means they were mis-sold.
Other people think they were mis-sold just because their endowment is not growing as they had expected. This may not be mis-selling if you were given correct advice at the time.
The company that advised you should have explained how your money would be invested and the risks involved. You should also have been told that most endowments are not guaranteed to repay your mortgage and whether or not it was suitable for you. Charges and costs involved should also have been explained.
In order for a firm or adviser to assess whether an endowment was suitable for you, they should have taken details about your finances, personal circumstances and future prospects.
If you think that the firm or adviser did not do these things and you think you were mis-sold an endowment and, as a result, you have lost out financially, you can get things put right. However, you may only get help if you took out your endowment on or after the 29th April 1988.
If you think you were mis-sold an endowment, please get in touch and we will explain the sort of questions you should have been asked by the adviser. This will help you assess whether you may have been mis-sold.
We can also send you additional literature to help you and inform you of your options. Contact us.
PLEASE NOTE WE ARE NOT AN ENDOWMENT COMPLAINT HANDLING COMPANY AND WE DO NOT HELP PEOPLE TO COMPLAIN AGAINST OTHER COMPANIES.
IF YOU ENGAGE A COMPLAINT HANDLING COMPANY BE AWARE THAT THEY MUST BE AUTHORISED UNDER THE CLAIMS MANAGEMENT REGULATION SET BY UP THE GOVERNMENT'S DEPARTMENT FOR CONSTITUTIONAL AFFAIRS ON 23 APRIL 2007.
Check to see if the complaint company your are considering is authorised on the government website.