Mortgage endowments: What is the problem?

Mortgage endowments: What is the problem?

Because of stock market conditions, many endowment policies taken out in the 1980s and 1990s are unlikely to pay out the amounts originally estimated. So if you’re using your endowment policy to pay off a mortgage, it may not pay out enough to do so.

If you have an endowment policy, you should have received regular letters over the last few years telling you whether your policy is on track to repay your mortgage. These are called reprojection letters.

They tell you:

• whether your policy is still on track to pay out the amount needed to repay your mortgage at the end of the term;
  
• the amount of projected shortfall, if any;
  
• the options open to you; and
  
• what further action you need to take.
  

If you haven't received a reprojection letter, contact your policy provider and ask for one. If you have received a reprojection letter, make sure you read it and take action if you need to.

If there is a high or significant risk that your policy is not on track to repay your mortgage (so the reprojection letter is either red or amber), this section tells you what you can do about it.

Mortgage: Top 5 Benefits of Home Mortgage Refinance

Mortgage: Top 5 Benefits of Home Mortgage Refinance
by Alan Lim

Home mortgage refinance can make your financial life better and more manageable. Read on to know what the reasons are.

A home mortgage refinance is simply the process of getting yourself a new home loan. You will then use the proceeds of the new loan to pay off your existing one. The reason why most people refinance is because their circumstances and needs have changed through the course of their existing mortgage.

Refinancing brings about a wide number of financial benefits, based on individual situations. Let us look through them one by one and see which aspect you can bank on.

1. Home loan refinance will lower your monthly payment. If you refinance your home to a mortgage terms with lowered interest rate, then you can reduce your monthly payment. If your credit has fortunately improved, or your home has increased in market value, you can easily qualify for a lower rate.

2. Refinancing can help in optimizing your loan structure. Remember the time when you were applying for your first loan? Most people are very eager about their new house and go for any mortgage term that will give them the loan fast. Sooner or later you will realize that the loan structure you got is not suitable for you any longer. Perhaps you got yourself an adjustable rate mortgage (ARM) and your fixed interest period is just about to expire. Or, you might have gotten a fixed- rate mortgage but would like the more flexible structure of ARM. With a home mortgage refinance, you will be able to choose from a number of options based on what you think best suits your financial objectives.

3. Refinancing can shorten your pay off terms. Let's say you decide to pay off your mortgage in 10 years rather than 20 years. This can actually save you thousands of dollars in interest. If you can afford to pay higher payment plan and are 101% sure that you will stay in your home for a long time, then a home mortgage refinance based on these terms will save you heaps.

4. Home loan refinance can help consolidate all your debts. You can take out a new larger loan to pay off not only your old loan, but the rest of your debts as well. This way, you lower you monthly repayments and save yourself the trouble of having to pay higher interest rates imposed by credit card companies and other lending agencies.

5. Refinancing can help you raise funds for large, one-time expenses. In home mortgage refinance, there exists what is called as the cash-out refinance. This involves taking out a loan that is larger than your existing one. You will get enough to pay off your old loans, and excess funds which you can use for large expenses which can include home improvement, your daughter's wedding, medical bills, college tuition, and so on.

Want to take a break from your mortgage? Why not try refinancing and enjoy financial freedom? Start now by visiting Home Mortgage Refinance or get more comprehensive Home Mortgage Refinance information here now.

Mortgage: When Refinancing a Mortgage Doesn't Help

Mortgage: When Refinancing a Mortgage Doesn't Help
by Debbie Dragon

Most of the time, refinancing your mortgage will result in a lower interest rate and/or lower monthly payments. It may shorten the length of time you have to pay on your mortgage until it's completely paid off. Refinancing can also help you use some of the equity in your home to pay off other bills- and many people use it to get themselves out of credit card debt, pay off personal loans or even their vehicles. The benefits of refinancing are many- but there are instances when refinancing your mortgage can do more harm than good.

Refinancing requires you to remove your escrow. Sometimes, a mortgage company will offer you a refinance deal; but it won't include your property or school taxes, and it won't include your homeowners insurance. For some people, this isn't a problem and setting aside the $60 a week (or whatever it may be) to ensure you have enough money to send out your taxes and homeowners insurance once a year is easy enough to do. For the majority of people however, it's all too easy to forget to set aside the money since it isn't due for months- and when the bills come in the mail, you suddenly have to come up with a few thousand dollars to pay them. If your refinance offer doesn't include escrow and you're used to having your taxes and homeowners insurance included with your mortgage payment- you might want to reconsider.

Also- if you're not paying attention to details, your refinance offer may seem like an amazing deal. Perhaps your goal is to use the refinance to also pay off some of your credit card accounts and your car payment. The payment may increase slightly- but after you add up the figures you find it's still lower than what you're paying now for your mortgage and each of the individual payments of the accounts your paying off. This is exciting! But if your refinance removes the escrow - you could very well end up paying more per month than you were initially keeping all of your payments separate!

Refinancing extends the terms of your mortgage. There are refinance offers that may result in a lower monthly payment- but in exchange for a longer mortgage term. Maybe before you refinanced, you had 20 years remaining on your mortgage. You refinance and the offer would require that you pay for 30 years in order to get the lower monthly payment. This can be an advantage or disadvantage, depending on your situation. If you are just in need of a reduced payment, the extra time on the mortgage may be worth it to you. On the other hand, if your purpose of refinancing wasn't because you were having trouble making the monthly mortgage payment, extending your mortgage terms will result in paying more over the long-term in interest.

Refinancing that doesn't reduce your principal balance. In some cases, refinancing a mortgage will result in lower payments that don't even change the amount you owe. For example, let's say you had a fixed-rate mortgage and owed $164,000. You pay a 5.375% interest rate and have 18 years left to pay on your mortgage. You might want to refinance to get a lower monthly payment because the $1186 that you currently pay is becoming difficult, so you look into a 5-year adjustable rate mortgage. The interest you're offered is 5.875%, with an interest only payment for 5 years. Your monthly payment would be reduced by $383 which is substantial and would probably make it easier to make your payments- however- over the 5 years on this adjustable rate, interest only payment plan, you would save $23,012 in monthly payments but the remaining balance on your mortgage would still be $164,000 at the end of the 5 years. If you kept the original mortgage and didn't finance, at the end of those 5 years, you would have paid your mortgage down to a balance of $132,975- over $31,000 paid on the mortgage! After 5 years on the interest-only adjustable rate mortgage plan, you would end up $8,013 poorer.
.

Mortgage: Do You Have An Endowment Policy?

Mortgage: Do You Have An Endowment Policy?
by David Carter

Do you have an endowment policy that you hope will eventually pay off your mortgage? If you do there is a very good chance that it might not be sufficient to repay your mortgage at the end of its natural term. If you have been reading the financial press you may already know this.

And if you have recently received a Red Letter from your endowment mortgage lender then you will already certainly know! So what do you do now? You must act promptly to ensure you can meet the potential shortfall when your endowment matures.

That's the really bad news, but the good news is that it is not too late to do something major about it, but you need to act quickly.

You may be unhappy with the way your policy was sold to you in the first place, and you would be in good company if you were, as hundreds of thousands of people have been and are taking steps against their endowment company. If this applies to you too, you do have a right to make a complaint, providing that you do something about it and complain within three years of receiving your first Red Letter. If you don't complain within that time, then your complaint may be rejected out of hand, no matter how justified your case may be, hence the urgency.

So who should you complain to? In Great Britain you need to complain to the company or person (perhaps a financial advisor) who sold you the policy in the first place and this may well be different from the company that actually issued the endowment policy. Explain your situation and tell them that you wish to make a formal complaint. They should then give you an official complaints procedure that you should follow.

In Britain you can also discuss the matter with the Citizen's Advice Bureau and you can visit their website at www.citizensadvice.org.uk or you can try the Financial Services Authority, their web site is www.fas.gov.uk/consumer.

Unlike the Citizen's Advice Bureau the FSA cannot give you one-to-one personal advice, but as the official regulator of all financial services companies within the United Kingdom, they will provide you with detailed fact sheets explaining how to tackle the problem, and a great deal of other information too.

If you reside outside the United Kingdom and suspect you have the same problem, the first thing you must do is to check if the endowment policy you have will be sufficient to cover your mortgage when it matures. If you find that it isn't, then make sure that you do something about it now before it is too late, and thus ensure that you don't have a serious problem somewhere further down the line.

David Carter’s latest published work is SPLAM! Successful Property Letting And Management. Splam! Contains over 240 pages of hints and tips on how to start your own property business on a limited budget, and how to successfully let residential property. You can view actual extracts of the book at http://www.splam.co.uk and order a download or hard copy at this site. He also runs a holiday cottage website where you can access over 7,000 cottages, apartments and villas worldwide at http://www.pebblebeachmedia.co.uk.

Mortgage: The Mortgage Types And Repayment Options

Mortgage: The Mortgage Types And Repayment Options
by James Copper

Unfortunately in recent years mortgages have become increasingly complex and wrapped up in technical jargon. Borrowers now need to consider at least two things, the type of mortgage loan they want and how they are going to repay it. Have a look at your options below.

• Types Of Mortgages
  

Variable Rate Mortgage

Rates on these loans fluctuate in line with general interest rates but because they are at the lenders discretion they dont necessarily move as far, or as fast. Discounts are usually offered to new borrowers in the early years.

Tracker Mortgage

Rates on tracker loans are normally linked directly to movements in the Bank of England base rate. The link may be for a limited period rather than the life of the mortgage.

Cashback Mortgage

When these loans are granted, cash payments are given to borrowers to spend how they like. They are typically between 6 per cent and 8 per cent of the loan.

Fixed Rate Mortgage

Rates of interest on these loans are guaranteed not to change for a specified period, typically the first three to five years of the mortgage.

Capped Rate Mortgage

With this type of loan, the interest rate is guaranteed not to exceed a fixed level during the capped-rate period. The advantage is that it can go down if rates are cut.

• Repayment Methods
  

Repayment Mortgage

Also known as capital and interest mortgages because part of the monthly payments gradually pays off the loan while the remainder covers the interest on the amount outstanding.

Offset Mortgage

These loans are taken out in conjunction with a current account or savings account. Regular mortgage repayments are required but at the same time the cash in the other accounts helps to reduce the loan, thereby saving interest. This can help to speed up repayment of the mortgage.

Interest Only Mortgage

As its name implies, the borrower pays the interest only on the loan during the mortgage term so the capital remains outstanding. Payments may also be made into a savings scheme, such as an Individual Savings Account, to repay the capital at the end of the term. Sometimes the loan is repaid out of the sale proceeds of the property.

Endowment Mortgage

This is where an interest-only loan is combined with a life assurance with-profits policy intended to pay out a sufficient sum to clear the mortgage at the end of the term. But endowment policy payouts are not guaranteed and many are currently expected to produce shortfalls.

• What You Need To Look Out For
  

Arrangement Fees

Most lenders nowadays charge you for the work involved in setting up a mortgage or to reserve a loan at a particular rate. The amounts can vary considerably between lenders. Paying more doesnt always get you a better deal.

High Lending Charge

If you are borrowing more than 90 per cent of the property value, check to see whether you will be charged an extra fee. This is to protect the lender in case you fail to keep up the payments, but not all of them make this charge.

Insurance

Some lenders will offer you a lower mortgage rate if you buy their home insurance products. They will also encourage you to take out their mortgage payment protection policy. It is usually better to shop around for the cheapest insurance deal.

Early Redemption Penalties

With mortgage special offers, fixed rate deals, etc, you will normally be charged a penalty if you pay off your loan within the offer period. In particular, try to avoid those loans with redemption penalties that extend beyond the end of the offer period as you will be stuck on the lenders standard variable rate.

Initial Disclosure Documents And Key Facts Illustration

Initial disclosure documents (IDDs) spell out mortgage advisers services, such as whether they can recommend products from one company only, or are free to sell mortgages from all lenders. Key facts illustrations (KFIs) are given to borrowers when they apply for or are recommended a mortgage. These outline the mortgages cost over its term, repayments, fees and an interest rate expressed as an annual percentage rate (APR).

Annual Percentage Rate

The APR tells prospective customers the interest rate over the life of the mortgage. This factors in any initial offer rate and then the lenders standard variable rate to which the mortgage reverts, as well as the impact of fees. The APR in the key facts document does not reflect that many mortgage borrowers switch to better deals than the lenders standard variable rate (SVR) after their initial offer expires. Neither does it include the potential costs on leaving the mortgage, such as administration fees and early repayment charges.

Standard Variable Rate

Because house prices are at a record high many people (probably including yourself) are now thinking of their mortgages in the long term as well as the upfront rate. For this reason it is worth knowing what current customers are paying. It is highly unlikely that when you come to the end of your fixed or discount rate period you will be on the same SVR as current customers. But you can use the information to see how the lender compares against others in the market.

James Copper enjoys writing on all areas of personal finance. He works for Any Loans who specialise in the Adverse Credit Remortgage and Adverse Credit Loans.

Mortgage: Understanding different mortgage types

Mortgage: Understanding different mortgage types

Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan.

But after a few enquiries, you soon realise that it's not so simple after all.

In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages. The list is already extensive enough to baffle all but the most determined.

The most important points are how you pay back the capital you borrow and how you pay the interest on it.

Paying back the capital

You can either pay a little at a time as you go (repayment mortgage) or pay it all off at the end (Interest only or endowment mortgages).

Repayment mortgages - Each monthly payment pays off a little of the underlying debt, as well as interest on the loan. At the end of the term the mortgage is cleared.

This is widely considered to be the most easy to understand and least risky mortgage type. But remember if you do not keep up with repayments the lender can repossess the property.

Interest only mortgages - With this type of mortgage, you pay-off the interest on the loan but not the capital. At the end of the mortgage term you are expected to repay the capital, how you fund this is your business.

Interest only mortgages have grown in popularity in recent years amongst buy-to-let investors and first-time buyers in particular because, put simply, they are cheaper than a repayment mortgage.

However, some experts are concerned that many people taking out an interest only mortgage are not giving enough thought as to how they will repay the capital.

Endowment Mortgages - You use an endowment policy to provide life insurance and save funds to repay the loan at the end of the term (usually 20-25 years).

If the investment performs badly, you could face a shortfall on your loan at the end of the repayment period. In the 1980s endowments were very popular and heavily marketed by lenders.

However, many people were not told of the investment risk. This was mis-selling and lenders faced huge claims for compensation.

As a result, endowment mortgages have declined sharply in popularity. Relatively few endowments are sold today but there are still millions of policies yet to mature.

Paying the interest

You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.

Variable rates - This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.

Fixed rates - The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit.

Very low rates may tempt you, but they can be used to trap you into paying over the odds at a future date. Check how long you will have to stay with the lender before you can switch without penalty.

Capped rates - These are fixed, but if rates fall you pay the lower rate. Such deals can be a good for budgeting.

Cash back deals - This is when lenders offer money back if you take out a particular product. However, nothing comes free in life and cashback mortgages may be weighed down with hefty penalty charges if you later want to switch lender.

Discounted rates - Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.

Key facts documents

Mortgage providers are now legally bound to present customers with a key facts document.

The Financial Services Authority (FSA), which regulates mortgages, says the key facts document should deliver clear, simple and user-friendly information to consumers about the mortgage offer.

The key facts document sets out the total cost of the loan - not just the headline interest rate - including any up-front fees.

Mortgage fees have been rising of late as providers reduce their headline annual percentage rates to attract new business.

Each new mortgage customer has to confirm that they have received the key facts before putting pen to paper.

Ten Key Questions
The government suggests mortgage customers should ask these 10 questions.

• How much can I afford to borrow?
  
• How can I tell which mortgage rate is best?
  
• What is the best type of mortgage for me?
  
• How should I repay it?
  
• Can I make lump sum payments?
  
• Are there any redemption penalties?
  
• Does this mortgage come with insurance?
  
• What other charges will I have to pay?
  
• What happens if I can't pay?
  
• What about the small print?

The Truth About Endowment Loans

The Truth About Endowment Loans
by Joseph Kenny

Chances are you've heard of an endowment mortgage, but you're not quite sure what it is. Nowadays this unique type of mortgage is in the news everywhere and is receiving a bad rap from many people. So what's the truth about an endowment mortgage, and how does it really work?

Endowment mortgages can be somewhat complex, although the system behind them is simple. They work in two parts. On one hand, they are a simple interest-only mortgage, and are treated as such. The borrower pays interest on the mortgage to his lender, and any terms that can apply to a normal mortgage are applied to these interest payments, including capped rates, fixed rates, variable rates, and any other special incentives the lender may offer. However, the borrower is not paying off his mortgage with these payments, as he would be with a typical mortgage: He is only paying the interest.

The mortgage itself is paid separately, and only at the time it ends. During the term of the loan, the borrower makes separate payments into an endowment fund. This fund is invested in stocks, shares, and life insurance, and allowed to mature throughout the term of the mortgage. At the close of the mortgage term, the endowment is cashed in to pay off the mortgage.

The downside here is obvious: If the endowment investments don't do well, then the endowment will not pay off the total balance, and the homeowner will still be responsible. Today's extremely low interest rates and sluggish stock market have turned some people away from the idea of endowment mortgages.

However, there are advantages to this unusual type of plan. Throughout the years of your mortgage, your monthly payments remain low (only the cost of interest) and will not be a strain in your income. The money you set aside for your endowment is, essentially, working for you; regardless of how well the market performs, chances are good that you will get back more than you paid in. Also, lenders that offer endowment mortgages offer borrowers a few escape clauses. If your endowment is in progress, and the stock market is doing poorly, you may be given the option to opt out of your endowment and invest your money instead in an additional savings plan which accrues interest on your payments. It won't gain you as much as an endowment potentially could, but it will protect you against poor investment performance. Most lenders will also allow you to switch your entire mortgage, or just the amount of the projected shortfall, to a standard repayment mortgage.

For the financially organized, endowment funds can be a great way to pay your way through owning a home and come out clean on the other side. With an endowment mortgage, just as with any other investment, it pays to keep a close eye on your cash.

Joseph Kenny is the webmaster of the loan information sites http://www.selectloans.co.uk/ and also http://www.ukpersonalloanstore.co.uk.

Mortgage: A Beginners' Guide to Mortgage (UK)

Mortgage: A Beginners' Guide to Mortgage (UK)
By Ann Gibson

The decision to mortgage house does not in any way show that you are not emotionally attached to your house. On the other hand, it was your concern for the house that restrained you from selling it. As compared to the sale of house, mortgage is a much better option. You continue holding the house and living there for as many years as you want.

The only problem however is that the loan provider has kept lien on home to himself, and keeps using it as a stick to exhibit what can be the consequences of being irregular on the mortgage repayments. In the worst of circumstances, when the borrower has not repaid the mortgage, the loan provider has the right to repossess home.

What can the borrower do in such circumstances? There is not much to do once the loan provider has made up his mind to repossess home. Recovering home from the loan provider in such cases will be much more costly.

A more effective solution to the problem would be to go by the rules. Continue paying as much has been decided between you and the loan provider, and try to be disciplined in repayments.

This isn’t as difficult a solution as most of us will think. The following illustration would make things clearer. For a person who earns a monthly income of ₤100, it will be difficult to pay ₤30 at a time. However, when he is required to pay ₤1 over a period of 30 months, it will be relatively easier. The monthly installment method of repaying mortgages uses the same concept. The borrower will be required to pay a monthly installment every month. This goes towards amortising the mortgage balance over the specified term.

There are other methods for paying off the mortgage too. Among the alternative methods, interest only mortgage repayment is the most important. An interest only mortgage repayment method allows borrower to pay only interest on the mortgage. Thus, at the end of the term the balance remaining unpaid is the amount actually taken. How the balance of the mortgage will be repaid at the end of the term will further categorise mortgages into pension mortgage and endowment mortgage.

Pension mortgage employs the pension for disbursing the unpaid mortgage balance. Normally 25% of the pension is available tax-free to every borrower. Pension is the result of contribution of the employer and the employees over the work life of the borrower. Thus, utilizing pension for repaying mortgage will not be much burdensome to the borrower.

Endowment method of paying off mortgages will utilize the amount saved by borrower in an endowment policy over a period. Since, the endowment policy will be invested in shares and stocks; there are chances of the endowment fund growing profitably. Similarly, there are chances of the endowment fund not faring properly and resulting in loss to the borrower.

Mortgages are commonly classified into three, depending on the borrower and the purpose for which it is being used. A first time buyer mortgage is for the borrowers who are buying house for the first time. Mortgage terms may differ for this kind of borrowers in order to incorporate the relative weakness of their finances. These borrowers become eligible for discounted rates of interest.

Another classification of mortgages is buy to let mortgage. Buy to let mortgage, as the name suggests will be for borrowers who already have a home and they want to use the new home for letting out on hire. A distinct feature of this type of mortgage is that the borrower will pay monthly installment through the rental received.

Finally, there are council right to buy mortgages. Council right to buy mortgage are for the people who have been living as council tenants. They have got an opportunity to buy the council home. Because of the lack of personal resources, they use the council right to buy mortgage.

Because of the home serving as collateral, interest rate is at an all time low on mortgages. Always seek a mortgage from prestigious loan providers in the UK. The quality of the mortgage deals arranged by them is excellent. Also, there is no fear of several additions to the mortgage in the form of extra fees.

We have always stressed on the need for good decision making on mortgages. Good decision making ensures that mortgage is safely repaid and the worst fear of losing home on repossession never comes true.

Loan borrowing is like once in a life time decision and much is at stake. It is indeed not a good thing that many people are misguided into taking loans that are not appropriate to their financial situation. This leads to many allied misgivings. As a financial consultant the only driving force of Ann Gibson is to provide proper knowledge. Because knowledge in respect to loan borrowing is power and exudes financial benefits.He works for mortgage web site cheapest mortgage uk.To find a cheapest mortgage,adverse credit mortgage, residential Mortgage that best suits your need please visit http://www.cheapestmortgageuk.co.uk

What to do with an endowment policy you no longer want

What to do with an endowment policy you no longer want

The question of whether or not you should cash in an endowment policy depends very much on your individual circumstances: for example, whether you are confident that you can repay your mortgage by other means - perhaps by trading down your property. Or perhaps you feel the money could be put to better use - either in other forms of investments or simply to pay for a world cruise.

An important point to remember is that if you surrender the policy, you will lose the life insurance cover, which could be quite costly to replace as you get older or if you are ill.

If you do decide in favour of cashing in your policy, the first step is to ask the insurance company for a surrender value. As well as giving you this information, it is obliged to tell you that there is a second-hand market available on which you may be able to sell your policy.

Selling on your policy might provide you with a sizeable premium above the surrender value, which is normally set at a low level because the insurance company is anxious to retain your money.

Once you have obtained the surrender value, the next step is to contact one - or several - of the companies dealing in second-hand policies. The Tep market has grown enormously in the past 20 years or so. Originally there was only one company that auctioned life policies, but during the 1980s a large number of private market makers were formed to buy and sell endowment policies directly, without going through the auction system.

During the stock market depression, demand for second-hand policies - as for most other investments - dropped to a low level, and the prices offered were often not much above - or even below - the surrender values.

In recent years, though, the Tep market has been transformed by a surge in demand, mainly from institutional investors and especially in Europe, where with-profit funds are not generally available. It is estimated that the market has a current annual turnover of £500m a year.

Institutions are attracted by having a "safe" core investment for their funds, with the prospect of a steady return, while private investors are drawn by the prospect of acquiring a ready-made investment with the bulk of the charges having already been paid in the early years. A Tep is a savings plan with a "lock in" value made up of the sum assured plus the accrued annual reversionary bonuses, which cannot be taken away. So there is little or no risk of losing money.

If you are lucky enough to pay less than the "lock in" value then you are guaranteed a profit. In most cases, investors are likely to pay a premium to the "lock in" value in the hope that over the years there will be sustained return over and above the premiums which are paid by the new owner of the policy.

Private investors can cover school and university fees - or provide additional retirement income - by buying several Teps maturing over a period of years. These can be cashed in using the investor's annual capital gains allowance, allowing the proceeds to be received tax-free.

One problem in terms of long-term planning is that if the original policyholder dies, the policy matures immediately. However, in most cases, the policy simply runs to maturity at a known date.

There are six main companies who are members of the Association of Policy Market Makers, which is regulated by the Financial Services Authority (FSA) and has code of conduct. They account for something like 95% of the total Tep market. There are also some smaller market makers not regulated by the FSA, who trade through independent financial advisers for compliance purposes.

Market makers claim that current demand for Teps considerably exceeds supply. They are confident that the expected huge flow of Standard Life policies can easily be absorbed, although a really large volume of extra sellers might result in a drop in the premium paid above the surrender value.

Currently, the average premium paid is between 5% and 15% above the surrender value, although it could be a lot higher for the "right" kind of policies: namely, those which are in most demand. Don't be fooled by any of the extravagant claims of premiums over 30%: that is most unusual.

The ratio of premium to surrender value varies considerably according to the size of the accumulated "lock in" value, the length of the policy until maturity, and the status of the insurance company. Normally, market makers insist that the policy has a surrender value of at least £3,000 and has been running for a period of five years. The highest premiums are paid for policies with 10 to 15 years to run before maturity.

Some market makers will only buy policies if they have a matching buyer. Others like to build up large portfolios of policies, providing a choice for potential buyers. All of them may turn their noses up at policies from insurance companies who are financially weak and may fail to provide a decent return. However, that is not the case with Standard Life, whose policies in the past have often earned an extra premium on the secondhand market.

It is definitely worth looking around for competitive offers because some market makers may have lots of potential buyers prepared to pay higher prices. Names of the different market makers can be easily obtained via the internet. You can obtain competitive price offers to get an idea of how much your policy is worth compared with the benchmark surrender value, and you do not have to commit yourself to sell.

Trading in your endowment policy

Trading in your endowment policy

If you have an endowment mortgage and are worried – don't make any hasty decisions. Check the facts first. Never just cash in an investment or savings plan or stop paying in without taking professional advice – you could lose out financially.

With–profit endowment policies are long–term investment products. They are designed to be held through to maturity. If for whatever reason you're thinking of surrendering or cashing in your policy, make sure your endowment company tells you about ALL the options – these include the option of trading the policy in as well as surrendering it, if it has been running for at least five years.

If you surrender your policy, the life office pays you a surrender value for it. If you trade it in, you sell the policy to a third party (usually via a traded endowment company, sometimes called a market maker). The new owner takes over the policy and pays the premiums but the assurance remains on the life of the original policyholder (you). So when it matures or if the original policyholder dies, the new owner gets the money. Depending on how long the policy has been running, you may get more money trading it in rather than surrendering it.

If you're thinking of surrendering or trading–in your with–profits endowment policy because you think you were given bad advice to buy it in the first place, you should complain to the firm which sold you the policy. Do this before you even think about giving it up – you may be due compensation if you have lost out financially.

Make sure your endowment company tells you about the different options. Since 1 September 2002, firms must do this and you could have grounds for complaint if they do not.

Think through all the options before you actually decide to surrender or trade–in your policy. If you are unsure what to do, get independent financial advice.

How mortgage endowments work

How mortgage endowments work

With a repayment mortgage, your monthly payments gradually pay off the amount you borrowed (the capital) as well as the interest over a set period (the term).

But with an endowment mortgage, your monthly payments only cover the interest on the loan. They do not pay off any of the capital. At the end of the term, you need to pay off the capital using the money from your endowment policy.

An endowment policy is an investment plan that you usually pay into each month. Your money is invested – for example in shares or bonds – with the aim of making it grow enough to pay off the original loan when the mortgage term ends.

However, as investments can vary in value, there is usually no guarantee that the policy will pay out enough to repay the mortgage at the end of the term.

If you have an endowment mortgage and are worried, don't make any hasty decisions. Check the facts first. Never cash in your policy or stop your payments without taking proper advice.

Selling your endowment policy

Selling your endowment policy

When it comes to making a decision on stopping an endowment and surrendering it, it is important to check your policy and make sure there is some value in doing this.

Early redemption can result in making less than you would have if it carried on for its full term, but if you need to have the money, then this may be your only solution.

Of course, continuing to pay money into a poorly performing investment could be throwing good money after bad.

As well as surrendering it back to the company who sold it, policyholders also have the option of selling it to a third party.

This can have the added benefit of getting more for your policy than you would if it was sold back to the original issuer.

Different companies have different requirements when it comes to them buying your endowment.

Usually they require it to be with-profits or a with-profits whole life policy and have been running for a minimum number of years.

Other policies are difficult to sell to investors as they do not give the same levels of return as a with-profits.

An independent financial advisor could also be helpful in comparing offers and helping you get the most for your policy.

For doing the work they will charge a fee, but it could save you time and energy and also help you achieve the best possible price.

The main thing to remember with your endowment policy is that it is important.

You should not suddenly stop making payments or cancel the policy without doing research and taking the appropriate financial advice.

If you stop payments on a policy, you may lose any life assurance cover that it offered you - an important consideration for your dependents if you are then taken ill or die without having set up an alternative means of paying off the policy.

Modified endowments (U.S.)

Modified endowments (U.S.)

Modified endowments were created in the Technical Corrections Act of 1988 (H.R 4333, S. 2238) in response to single-premium life (endowments) being used as tax shelters. They are contracts with fewer than 7-level annual premiums, and are subject to more stringent tax regulations (tax code 7702, 7702A). They are also subject to IRA-like annuity rules (such as penalties for pre-death proceeds before age 59½). If a life insurance policy is changed and then fits the seven-pay rules, it may then be redefined as a modified endowment.

Traded endowments

Traded endowments

Traded endowment policies (TEPs) or second hand endowment policies (SHEPs) are traditional with-profits endowments that have been sold to a new owner part way through their term. The TEP market enables buyers (investors) to buy unwanted endowment policies for more than the surrender value offered by the insurance company. Investors will pay more than the surrender value because the policy has greater value if it is kept in force than if it is terminated early.

When a policy is sold, all beneficial rights on the policy are transferred to the new owner. The new owner takes on responsibility for future premium payments and collects the maturity value when the policy matures or the death benefit when the original life assured dies. Policyholders who sell their policies, no longer benefit from the life cover and should consider whether to take out alternative cover.

The TEP market deals exclusively with Traditional With Profits policies. The easiest way of determining whether an endowment policy is in this category is to check to see whether an it mentions units, indicating it is a Unitised With Profits or Unit Linked policy, if bonuses are in sterling and there is no mention of units then it is probably a traditional With Profits. The other types of policies - “Unit Linked” and “Unitised With Profits” have a performance factor which is dependent directly on current investment market conditions. These are not tradable as the guarantees on the policy are much lower and there is no gap between the surrender value and the market value.

Low cost endowment (LCE)

Low cost endowment (LCE)

A low cost endowment is a combination of: an endowment where an estimated future growth rate will meet a target amount and a decreasing life insurance element to ensure that the target amount will be paid out as a minimum if death occurs (or a critical illness is diagnosed if included).

The main purpose of a low cost endowment has been for endowment mortgages to pay off interest only mortgage at maturity or earlier death in favour of full endowment with the required premium would be much higher.

Full endowments

Full endowments

A full endowment is a with-profits endowment where the basic sum assured is equal to the death benefit at start of policy and, assuming growth the final payout would be much higher than the sum assured.

Unit-linked endowment

Unit-linked endowment

Unit-linked endowments are investments where the premium is invested in units of a unitised insurance fund. Units are encashed to cover the cost of the life assurance. Policyholders can often choose which funds their premiums are invested in and in what proportion. Unit prices are published on a regular basis and the encashment value of the policy is the current value of the units. This is the simplest definition.

Endowment Policy: Traditional With Profits Endowments

Endowment Policy: Traditional With Profits Endowments

There is an amount guaranteed to be paid out called the sum assured and this can be increased on the basis of investment performance through the addition of periodic (for example annual) bonuses. Regular bonuses (sometimes referred to as reversionary bonuses) are guaranteed at maturity and a further non-guaranteed bonus may be paid at the end known as a terminal bonus.

Endowment policy

Endowment policy

An endowment policy is a life assurance contract designed to pay a lump sum after a specified term or on earlier death (some policies also include critical illness as condition of payout).

Policies are typically traditional with-profits or unit-linked (including those with unitised with-profits funds).

Endowments can be cashed in early - known as surrendered - and will then be paid the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it. During adverse investment conditions, the encashment value or surrender value may be reduced by a 'Market Value Adjuster' to allow for the need to cash in units at a time when investment conditions are not ideal. This means that the investor would receive the surrender value less the market value adjuster.

Why have an endowment mortgage

Why have an endowment mortgage

The customer pays only the interest on the capital borrowed, thus saving money with respect to an ordinary repayment loan; the borrower instead makes payments to an endowment policy. The objective is that the investment made through the endowment policy will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus.

Up to 1984 qualifying insurance contracts (including endowment policies) received tax relief on the premiums known as LAPR (Life Assurance Premium Relief). This gave a tax advantage for endowment mortgages over repayment. Similarly MIRAS (Mortgage Interest Relief At Source) made having a larger mortgage advantageous as the MIRAS relief reduced as a repayment mortgage was repaid. This tax incentivisation toward endowment mortgages is not often commented on in the media when they discuss endowment mortgages.

An additional reason in favour of an endowment was that many lenders charge interest on an annual basis. This meant that any capital repaid on a monthly basis is not removed from the outstanding loan until the end of the year thus increasing the real rate of interest charged. In such a situation, payments into an endowment might benefit from any growth from the moment it is invested. Henceforth, the net investment return required for the endowment to pay the loan, would be less than the average mortgage interest rate over the same period.

Problems with endowment mortgages

Problems with endowment mortgages

The underlying premise with endowment policies being used to repay a mortgage, is that the rate of growth of the investment will exceed the rate of interest charged on the loan. Toward the end of the 1980s when endowment mortgage selling was at its peak, the anticipated growth rate for endowments policies was high (7-12% per annum). By the middle of the 1990s the change in the economy toward lower inflation made the assumptions of a few years ago look optimistic.

Regulation of investment advice and a growing awareness of the potential for regulatory action against the insurers lead to reduction in anticipated growth rates down to 7.5% and eventually as low as 4% per annum. By 2001 the sale of endowments to repay a mortgage was virtually seen as taboo.

Financial regulations introduced compulsory re-projection letters to show existing endowment holders what the likely maturity value of their endowment would be assuming standard growth rates.

This in turn lead to a dramatic rise in complaints of mis-selling and spawned a secondary industry that 'handles' complaints for consumers for a fee, even though they can pursue it themselves for free.

In many cases the insurer or broker responsible for the original advice have found in favour of the policyholder and have been required to restore their customers to the financial position they would have been in had they taken out a repayment mortgage instead. As of July 2006, UK banks and insurance providers have paid out approximately £2.2 billion in compensation.

Endowment mortgage

Endowment mortgage

An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more (usually Low-Cost) endowment policies. The phrase endowment mortgage is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal term.

The borrower has two separate agreements. One with the lender for the mortgage and one with the insurer for the endowment policy. The arrangements are distinct and the borrower can change either arrangement if they wish. In the past the endowment policy was often taken as additional security by lender. That is, the lender applied a legal device to ensure the proceeds of the endowment were made payable to them rather than the borrower; typically the policy is assigned to the lender. This practice is uncommon now.

Next post: Problems with endowment mortgages

Home
.