Protecting Your Home Against Endowment Shortfalls

Published Saturday September 1st 2001. Updated Monday 13th May 2002

You were sold an endowment policy on the basis that it would grow sufficiently to pay off your mortgage and give you a bonus cash lump sum as well?

But now it is more likely that you will be facing a shortfall ... your endowment policy won't even pay off your mortgage.

So what can you do?

  • Increase the money you pay into your endowment policy each month?
    The words "throwing", "good", "money", "after" and "bad" do spring to mind.
  • Save money in another investment savings scheme?
    But wouldn’t that be riskier? And wasn’t an endowment policy supposed to be relatively free of risk? Well, supposed to be.

No. There is only one sure way to know that your mortgage will be paid off in full . . .

     Switch part or all of your existing interest-only mortgage to a repayment one.

 

Repayment mortgages may seem old-fashioned, but they get the job done. Or in this case the mortgage, paid off.

According to Christine Farnish, Director of Consumer Relations at the FSA, "Making sure you can repay your mortgage loan is one of the most basic financial needs. If there's a risk that you won't be able to … then now's the time to decide on what to do. If you need to put more money aside to pay off your mortgage, it's a lot less painful to do it sooner rather than later".

And given that average interest rates have dropped from 7.74% to 5.75% between April 2000 and March 2002, most people have seen the monthly cost of their endowment mortgage drop. For a typical £60,000 interest only mortgage this equates to £1,194 a year.

Whatever happens with interest rates, at least you know that by making those payments each month you’re chipping away at the overall sum you owe. So by the time that endowment policy matures, the outstanding mortgage it was intended to pay off is going to be that much smaller.

 

But what will it cost?

That depends on the size of your expected shortfall. The problem with the traffic light letters is that whatever they tell you, they are still open to interpretation.

 

GREEN
Future growth does not need to exceed 6% per year to repay the 'target' sum. So you should be okay, but keep an eye on performance.
AMBER
Needs investment growth of between 6%-8% a year. There is significant risk of there being a shortfall.
RED
Requires future investment growth over 8% a year. Chances are you are going to see a sizeable shortfall. The letter will probably urge you to take action.

 

Of course, as has been evidenced in the last couple of years, even 6% can seem optimistic. If not, nearly 2 million people who had originally received Green letters wouldn’t now be looking to receive Amber or Red ones.

The typical monthly repayments that would be needed to clear a mortgage of an expected endowment shortfall within 5, 7 10, 12 or 15 years are:

 

 
5 Years
7 Years
10 Years
12 Years
15 Years
£5,000
£96
£72
£55
£48
£42
£6,000
£115
£87
£66
£58
£50
£7,000
£135
£101
£77
£67
£58
£8,000
£154
£116
£88
£77
£66
£9,000
£173
£130
£99
£87
£75
£10,000
£192
£145
£110
£96
£83
£15,000
£288
£217
£165
£144
£125
£20,000
£384
£290
£220
£193
£166
£25,000
£480
£362
£275
£241
£208

Figures are for illustrative purposes only. Amounts rounded to nearest pound.
Examples based on a 5.75% APR with daily rest interest calculation.
Actual monthly payments required will depend on the individual
mortgage and the interest rates being applied.

Whilst this will give you a general idea, chances are you have more going on in your finances than just an endowment policy and an interest only mortgage.

You have credit cards and loans to pay. You've got holidays to save for. A pension plan to fund. And that is not including the fact that you have to get on with the whole life thing, and that can be pretty expensive at times.

 

 

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