The Endowment Mortgage Scandal in UK - Millions Left with Shortfalls May be Entitled to Compensation
by Martin Nolan
During the 1980’s and 90’s a new concept of property mortgaging arrived in the UK. Endowment mortgages became extremely popular with homebuyers who wanted a secure but affordable method of repaying their mortgage debt. Most large financial organisations were happy to offer these products and they were sold by large banks, building societies and high street brokers.
The general concept of an endowment mortgage was that the customer would make regular installments into an investment fund managed by the endowment provider (the big financial organisations). The investment would eventually generate enough money to pay off the mortgage debt in full and usually the customer would be left with an extra amount or bonus at the end. In addition to this the customer would also have the benefit of life insurance for the duration of the investment period with cover provided up to the value of the endowment maturity value. The overall financial package of a combined insurance and savings product linked to lower mortgage payments, was almost too good to be true. As a result there are currently around ten million active endowment policies in the UK.
Like most things that seem too good to be true, endowment mortgage policies have sadly proven to be extremely disappointing for the vast majority of customers. These investment products are closely linked to the worlds stock markets but with the recent 5 year global recession and sharp downturn experienced by most countries, the anticipated return on investment is proving to be far less than the endowment providers anticipated.
It is estimated that 80% of all existing endowment products will fail to meet the projected target amount and some will have considerable shortfalls. This means that potentially as many as 8 million people in the UK will fail to reap any bonuses from their plans but worst of all may completely fail to pay off their mortgage debt by the time their plan matures.
It was not long before the consumer groups began asking serious questions about the credibility of endowment policies and the regulatory body in the UK Financial Services Authority (FSA) was forced to act following complaints about widespread misselling.
It has since become apparent that millions of endowment policies were mis-sold in that the individuals or organisations conducting the sale, failed to follow the rules and notify the customer of certain key features relating to the advantages and disadvantages of the endowment products. Far too much emphasis was placed on the benefits of the products with little or no discussion about the risks involved with potentially erratic investments that were linked to the stock market. The message was that the plan simply could not fail and this was a flawed and misleading sales pitch.
The FSA have devised a scheme that allows endowment policyholders to make a formal complaint about possible misselling. The rules allow for such a complaint to be made once a “warning” letter has been received from the endowment provider indicating that the plan will more than likely fail to meet the projected target amount (this is known as a policy shortfall). If the complaint is upheld, the endowment provider or the salesman / selling organization must make an offer of compensation to the customer. The average compensation award is thought to be in the region of £5000. Whilst it is possible for customers to complain personally, the FSA process is regrettably complex and many customers will need assistance from “professional claims handlers” in order to pursue their complaint effectively. Many endowment providers corrupt the process by using technical jargon and complex rules. They have also introduced “Time barring” arguments which have been allowed by the FSA. The rule here is that you have generally three years from the date of your first warning letter to make your complaint. This serves to confuse customers and many complaints that are pursued direct without professional assistance will simply fail. The majority of customers do not even bother to complain because of the complexities involved.
Summary: Thanks to consumer groups and professional claims handling bodies the UK’s endowment misselling scandal is gathering a head of steam and victims are now more aware of the issues.
The important aspects for customers to remember are:
• You only have a limited amount of time to complain – 3 years from the date of your first letter from the endowment provider warning about a possible shortfall.
• You must complain now to ensure that any shortfall in the projected target value of your policy is recouped. You may not recover the full shortfall amount but your compensation will go some way to bridging the gap.
• You must also seek financial advice on your mortgage situation because if a shortfall has been highlighted, the endowment plan you have is NOT going to meet your mortgage debt on maturity
If you currently have an endowment mortgage policy you must act now to ensure that you and your family’s future remains secure. Be aware of the issues, be aware of the need to correct the misselling that you have been the victim of and most importantly be aware that only YOU can change the position that you now find yourself in.
For more information on making endowment compensation claims contact The Claims Connection managed by Winston Solicitors a regulated UK law firm.
Feb 29, 2008
Feb 22, 2008
Endowment Insurance Explained
Endowment Insurance Explained
by Joe Stewart
Similar to Term life insurance, Endowment insurance is also designed to cover the insured person for a specific period of time, however, that's what the similarities end. Endowment is more similar to Whole Life insurance except that an Endowment policy matures faster than Whole Life does.
An Endowment policy lasts for a specific period of time, for example, a 20 Year Endowment or an Endowment at 60 years. All that this means is that the policy will be paid off in that time frame. In a 20-year Endowment all of your premiums would be paid off in 20 years. In an endowment at 60 you only pay life insurance premiums until you're 60 years old, at which time your policy would be paid up in full. This makes Endowment much more expensive than regular Whole life insurance because you're taking an entire lifetime of premiums and compacting them into a short period of time. The shorter the period, the higher your premiums will be.
Endowment policies build cash value much faster than Whole Life policies do because you're paying your premiums out in a shorter period of time. During the period of coverage the insurance company will pay the beneficiary of the policy the face value in the event of the death of the person insured. If that person does not die during the specified period of the Endowment, then the owner of the policy will receive the face value when the policy reaches maturity. The cash value and face value will both equal the same amount when the policy matures.
The main purpose of owning an Endowment policy is so you can acquire a rapid buildup of funds over a short period of time. These funds can be used for any purpose needed. Endowment policies are not nearly as popular as they used to be.
Joe Stewart is a webmaster and former life and health insurance agent.
by Joe Stewart
Similar to Term life insurance, Endowment insurance is also designed to cover the insured person for a specific period of time, however, that's what the similarities end. Endowment is more similar to Whole Life insurance except that an Endowment policy matures faster than Whole Life does.
An Endowment policy lasts for a specific period of time, for example, a 20 Year Endowment or an Endowment at 60 years. All that this means is that the policy will be paid off in that time frame. In a 20-year Endowment all of your premiums would be paid off in 20 years. In an endowment at 60 you only pay life insurance premiums until you're 60 years old, at which time your policy would be paid up in full. This makes Endowment much more expensive than regular Whole life insurance because you're taking an entire lifetime of premiums and compacting them into a short period of time. The shorter the period, the higher your premiums will be.
Endowment policies build cash value much faster than Whole Life policies do because you're paying your premiums out in a shorter period of time. During the period of coverage the insurance company will pay the beneficiary of the policy the face value in the event of the death of the person insured. If that person does not die during the specified period of the Endowment, then the owner of the policy will receive the face value when the policy reaches maturity. The cash value and face value will both equal the same amount when the policy matures.
The main purpose of owning an Endowment policy is so you can acquire a rapid buildup of funds over a short period of time. These funds can be used for any purpose needed. Endowment policies are not nearly as popular as they used to be.
Joe Stewart is a webmaster and former life and health insurance agent.
Feb 19, 2008
The Cure For Outdated Endowment Policy: Repayment Remortgages
The Cure For Outdated Endowment Policy: Repayment Remortgages
by Amanda Thompson
If bulls and the bears of the stock market have no effect on your mortgage plan then you must apply for endowment to repayment remortgage. An endowment mortgage is a financial product offered mainly in the UK. Endowment mortgage comprise of an interest only loan secured on your mortgage and an investment in the stock market. As against an ordinary repayment mortgage, the customer pays only the interest on the capital. The balance goes into the endowment fund. This stock oriented mortgage policy was workable in the context of stock boom of the 1980s and 1990s. At the end of the mortgage term, it seemed plausible that the investment would pay off the capital. But present day market status is unreliable and fails to make endowment mortgage a much sorted out plan. In recent years it is appropriate to revolutionize your endowment mortgage to repayment remortgage.
Remortgage is highly misunderstood for over the time we grow too comfortable in our mortgage policy. Holders of endowment mortgage are urged take up repayment remortgage so as to forestall the risk of being in huge debts once your mortgage matures. This you might shun as a possibility. But it is a very functional possibility. Why remortgage? If that is your query! Then you need to read more about your endowment mortgage. Repayment remortgage is very essential because endowment remortgage suffers from two major problems – shortfall and mis-selling.
Most consumers did not realize that their endowment mortgage could not reach its desired target. The risk of shortfall in endowment mortgage is a very strong vote in favour of repayment mortgage. Endowment policy is not an appropriate mortgage for everyone. So, if you have been sold an endowment mortgage without making you aware of the risk involved then perhaps you have been mis-sold their endowment policy. Any of these condition calls for fast action in favour of repayment remortgage.
The trends in the stock market are unanticipated. You never know when the wind changes the direction and you might not be able to repay your mortgage. This could mean capitulation of your endowment policy. Before this effects your credit status get a repayment remortgage. Mortgage is secured loan keeps your property as a compensation of the loan. Under no circumstances you can risk the possession of your property by giving consent to an incompatible mortgage deal. Remortgage to a repayment mortgage is definitely a much more dependable option. The monthly payment of repayment remortgage pays both the loan amount and the interest. As long as you don’t falter with making your repayments at remortgage, you will be able to forfeit your remortgage completely by the end of the loan term.
The remuneration with repayment remortgage is bounteous. The wavering of the stock market will no longer amount to your cause of concern. You will continue to enjoy all the benefits of your policy with a repayment remortgage. Endowment mortgage frequently fails to accumulate any funds and prove to be expensive than a repayment remortgage. The major disadvantage with endowment mortgage is that if you stop paying for your premium in the early years, the cash in value of endowment policy is very low. Selling the policy would mean loosing all the money that you have paid in form of premium. This makes endowment mortgage a very inflexible mortgage. By selecting a repayment remortgage over endowment mortgage you will have enough money and would not have to rely on other sources. By opting for repayment remortgage your claim for endowment compensation will not be exacted.
For all the twenty to twenty five years of your mortgage, you can’t keep on checking the stock market news in a hope that it may illustrate an affirmative after effect. You have exhausted enough money like that. Your money deserves a convalescent capitalization. You ought to have a repayment remortgage. Security, that your mortgage will be paid off, is the primary achievement of repayment remortgage which is not offered by endowment mortgage. Living in constant fear is not a recompense that will avoid you from trading your endowment policy for repayment remortgage. Indubitably, your monthly outgoings with repayment remortgage will the higher but there will be contentment which is our constant endeavour in every enterprise.
Amanda Thompson holds a Bachelor’s degree in Commerce from CPIT and has completed her master’s in Business Administration from IGNOU. She is as cautious about her finances as any person reading this is. She works for the personal loan web site www.chanceforloans.co.uk
by Amanda Thompson
If bulls and the bears of the stock market have no effect on your mortgage plan then you must apply for endowment to repayment remortgage. An endowment mortgage is a financial product offered mainly in the UK. Endowment mortgage comprise of an interest only loan secured on your mortgage and an investment in the stock market. As against an ordinary repayment mortgage, the customer pays only the interest on the capital. The balance goes into the endowment fund. This stock oriented mortgage policy was workable in the context of stock boom of the 1980s and 1990s. At the end of the mortgage term, it seemed plausible that the investment would pay off the capital. But present day market status is unreliable and fails to make endowment mortgage a much sorted out plan. In recent years it is appropriate to revolutionize your endowment mortgage to repayment remortgage.
Remortgage is highly misunderstood for over the time we grow too comfortable in our mortgage policy. Holders of endowment mortgage are urged take up repayment remortgage so as to forestall the risk of being in huge debts once your mortgage matures. This you might shun as a possibility. But it is a very functional possibility. Why remortgage? If that is your query! Then you need to read more about your endowment mortgage. Repayment remortgage is very essential because endowment remortgage suffers from two major problems – shortfall and mis-selling.
Most consumers did not realize that their endowment mortgage could not reach its desired target. The risk of shortfall in endowment mortgage is a very strong vote in favour of repayment mortgage. Endowment policy is not an appropriate mortgage for everyone. So, if you have been sold an endowment mortgage without making you aware of the risk involved then perhaps you have been mis-sold their endowment policy. Any of these condition calls for fast action in favour of repayment remortgage.
The trends in the stock market are unanticipated. You never know when the wind changes the direction and you might not be able to repay your mortgage. This could mean capitulation of your endowment policy. Before this effects your credit status get a repayment remortgage. Mortgage is secured loan keeps your property as a compensation of the loan. Under no circumstances you can risk the possession of your property by giving consent to an incompatible mortgage deal. Remortgage to a repayment mortgage is definitely a much more dependable option. The monthly payment of repayment remortgage pays both the loan amount and the interest. As long as you don’t falter with making your repayments at remortgage, you will be able to forfeit your remortgage completely by the end of the loan term.
The remuneration with repayment remortgage is bounteous. The wavering of the stock market will no longer amount to your cause of concern. You will continue to enjoy all the benefits of your policy with a repayment remortgage. Endowment mortgage frequently fails to accumulate any funds and prove to be expensive than a repayment remortgage. The major disadvantage with endowment mortgage is that if you stop paying for your premium in the early years, the cash in value of endowment policy is very low. Selling the policy would mean loosing all the money that you have paid in form of premium. This makes endowment mortgage a very inflexible mortgage. By selecting a repayment remortgage over endowment mortgage you will have enough money and would not have to rely on other sources. By opting for repayment remortgage your claim for endowment compensation will not be exacted.
For all the twenty to twenty five years of your mortgage, you can’t keep on checking the stock market news in a hope that it may illustrate an affirmative after effect. You have exhausted enough money like that. Your money deserves a convalescent capitalization. You ought to have a repayment remortgage. Security, that your mortgage will be paid off, is the primary achievement of repayment remortgage which is not offered by endowment mortgage. Living in constant fear is not a recompense that will avoid you from trading your endowment policy for repayment remortgage. Indubitably, your monthly outgoings with repayment remortgage will the higher but there will be contentment which is our constant endeavour in every enterprise.
Amanda Thompson holds a Bachelor’s degree in Commerce from CPIT and has completed her master’s in Business Administration from IGNOU. She is as cautious about her finances as any person reading this is. She works for the personal loan web site www.chanceforloans.co.uk
Feb 17, 2008
Introduction to Endowment Life Insurance Policies
Introduction to Endowment Life Insurance Policies
by Barry Waxler
Endowment Life Insurance Policies pay the full cash amount to your beneficiary should you happen to die unexpectedly. The good news is that they pay the full cash amount to you if you should happen to live.
The Endowment Life Insurance Policy was developed as a method of combining two different and important functions of sound personal financial management. The two functions are savings and risk management. Both functions are considered essential elements of a good financial plan, so it was rather natural to find a way to combine them.
The Endowment Life Insurance Policy works by requiring a rather larger than normal premium payment. This premium payment can be paid in many different ways including a single lump sum payment although it is normally paid much the same as a regular insurance premium. The premium payments are invested and during the duration of the policy continue to build cash value. The cash value continues to grow until a specified maturity date when the entire cash value is paid to the policy holder.
If the policy holder should happen to die during the life of the policy, the final value of the endowment, or the target value that would have been paid at maturity, is paid as a death benefit to the policy holder’s beneficiary. This makes Endowment Life Insurance Policies savings accounts that double as Life Insurance.
It is possible in certain Endowment Life Insurance Policies to exercise control over the investment choices. It is also possible to withdraw funds from the policy before the maturity date. Of course, the early withdrawals, called surrender values, may be much less than the true value of the policy should it be held to maturity. However, it is still possible to take the surrender value if economic necessity requires it. Another option is to sell the Endowment Policy to a third party.
There is a market for Endowment Life Insurance Policies. The market is made possible by the fact that surrender values are often so much less than the maturity values. The purchaser pays a bit more than the surrender value and assumes the premium payments and beneficiary rights of the policy. The purchaser’s investment will be recouped when the Endowment reaches maturity. Endowment Life Insurance Policies suffered a decline during the 1970’s and 1980’s as other forms of savings and investment became more popular and profitable. Today, the interest rates have made them attractive again and worth investigating as an Insurance option.
by Barry Waxler
Endowment Life Insurance Policies pay the full cash amount to your beneficiary should you happen to die unexpectedly. The good news is that they pay the full cash amount to you if you should happen to live.
The Endowment Life Insurance Policy was developed as a method of combining two different and important functions of sound personal financial management. The two functions are savings and risk management. Both functions are considered essential elements of a good financial plan, so it was rather natural to find a way to combine them.
The Endowment Life Insurance Policy works by requiring a rather larger than normal premium payment. This premium payment can be paid in many different ways including a single lump sum payment although it is normally paid much the same as a regular insurance premium. The premium payments are invested and during the duration of the policy continue to build cash value. The cash value continues to grow until a specified maturity date when the entire cash value is paid to the policy holder.
If the policy holder should happen to die during the life of the policy, the final value of the endowment, or the target value that would have been paid at maturity, is paid as a death benefit to the policy holder’s beneficiary. This makes Endowment Life Insurance Policies savings accounts that double as Life Insurance.
It is possible in certain Endowment Life Insurance Policies to exercise control over the investment choices. It is also possible to withdraw funds from the policy before the maturity date. Of course, the early withdrawals, called surrender values, may be much less than the true value of the policy should it be held to maturity. However, it is still possible to take the surrender value if economic necessity requires it. Another option is to sell the Endowment Policy to a third party.
There is a market for Endowment Life Insurance Policies. The market is made possible by the fact that surrender values are often so much less than the maturity values. The purchaser pays a bit more than the surrender value and assumes the premium payments and beneficiary rights of the policy. The purchaser’s investment will be recouped when the Endowment reaches maturity. Endowment Life Insurance Policies suffered a decline during the 1970’s and 1980’s as other forms of savings and investment became more popular and profitable. Today, the interest rates have made them attractive again and worth investigating as an Insurance option.
Feb 16, 2008
What is Endowment Insurance?
What is Endowment Insurance?
by Steve Sterling
In Life Insurance, by Dan McGill, 1967 Edition, we read, “from the standpoint of structure, it may be said that an endowment policy is a combination of pure or level term insurance and a pure endowment. The same description may be applied to a whole life policy, which is simply a combination of term insurance for a period extending to age one hundred and a pure endowment for the same term.”
Barron’s Dictionary of Insurance Terms by Harry W. Rubin, third edition, 1991 defines PURE ENDOWMENT as “Life insurance policy under which its face value is payable only if the insured survives to the end of the stated endowment period.”
The Handbook of Insurance by Clyde J. Crobough, 1931, speaks of the attributes of endowment insurance: “Some of the special merits of the endowment policy may be summarized briefly: 1. Is a method of compulsory saving. 2. Combines protection and investment. 3. Helps to create funds for special objectives which the policyholder may use.”
Endowment life insurance policies have been rarely used in the last ten years. Prior to this, they were popular as a savings mechanism at many life insurance companies. Today, annuities and or universal life have replaced endowments as a popular concept. However currently, endowment life insurance policies seem to be making a comeback. More and more insurers have been offering these policies to satisfy various life insurance and income tax needs. The advantage of an endowment life insurance policy over a tax-deferred annuity is that upon passing to the beneficiary, income tax on the interest earned will have to be paid on the annuity but not on endowment life insurance policy.
Dale M. Krause is a National Medicaid Crisis Planning Specialist with Krause Financial Services, Inc. Mr. Krause’s educational credentials include a B.S. degree from the University of Wisconsin-Stevens Point, Wisconsin; a J.D. degree from Thomas Cooley Law School, of Lansing, Michigan; and, an LL.M. in Taxation from DePaul College of Law, of Chicago, Illinois.
Mr. Krause is also a member of the Wisconsin and Michigan Bars, National Academy of Elder Law Attorneys, Inc., Coalition of Wisconsin Aging Groups, Institute of Elder Planning Studies, International Association For Financial Planning, The Financial Planning Association, Society of Financial Service Professionals, Fidelity Advisor Council, and is a licensed insurance agent and stockbroker. Mr. Krause is a regular speaker at continuing legal education forums throughout the United States. Dale M. Krause, J.D., LL.M. KRAUSE FINANCIAL SERVICES 1120 Red Wing Trail, De Pere, WI 54115 Telephone: (866) 605-7437 Fax: (866) 605-7438 E-mail: dalekrause@insurance-endowment.com Website: www.insurance-endowment.com
by Steve Sterling
In Life Insurance, by Dan McGill, 1967 Edition, we read, “from the standpoint of structure, it may be said that an endowment policy is a combination of pure or level term insurance and a pure endowment. The same description may be applied to a whole life policy, which is simply a combination of term insurance for a period extending to age one hundred and a pure endowment for the same term.”
Barron’s Dictionary of Insurance Terms by Harry W. Rubin, third edition, 1991 defines PURE ENDOWMENT as “Life insurance policy under which its face value is payable only if the insured survives to the end of the stated endowment period.”
The Handbook of Insurance by Clyde J. Crobough, 1931, speaks of the attributes of endowment insurance: “Some of the special merits of the endowment policy may be summarized briefly: 1. Is a method of compulsory saving. 2. Combines protection and investment. 3. Helps to create funds for special objectives which the policyholder may use.”
Endowment life insurance policies have been rarely used in the last ten years. Prior to this, they were popular as a savings mechanism at many life insurance companies. Today, annuities and or universal life have replaced endowments as a popular concept. However currently, endowment life insurance policies seem to be making a comeback. More and more insurers have been offering these policies to satisfy various life insurance and income tax needs. The advantage of an endowment life insurance policy over a tax-deferred annuity is that upon passing to the beneficiary, income tax on the interest earned will have to be paid on the annuity but not on endowment life insurance policy.
Dale M. Krause is a National Medicaid Crisis Planning Specialist with Krause Financial Services, Inc. Mr. Krause’s educational credentials include a B.S. degree from the University of Wisconsin-Stevens Point, Wisconsin; a J.D. degree from Thomas Cooley Law School, of Lansing, Michigan; and, an LL.M. in Taxation from DePaul College of Law, of Chicago, Illinois.
Mr. Krause is also a member of the Wisconsin and Michigan Bars, National Academy of Elder Law Attorneys, Inc., Coalition of Wisconsin Aging Groups, Institute of Elder Planning Studies, International Association For Financial Planning, The Financial Planning Association, Society of Financial Service Professionals, Fidelity Advisor Council, and is a licensed insurance agent and stockbroker. Mr. Krause is a regular speaker at continuing legal education forums throughout the United States. Dale M. Krause, J.D., LL.M. KRAUSE FINANCIAL SERVICES 1120 Red Wing Trail, De Pere, WI 54115 Telephone: (866) 605-7437 Fax: (866) 605-7438 E-mail: dalekrause@insurance-endowment.com Website: www.insurance-endowment.com
Feb 12, 2008
Financial Freedom: How To Achieve It With Your Home
Financial Freedom: How To Achieve It With Your Home
by Geoff Morris
Do you still believe that your main objective in life is to pay off your mortgage?
Many people these days are getting more and more concerned as they approach retirement age. Even those in their late twenties are beginning to become concerned about the effects of old age. What has brought on such a dilemma in those so young? It is the plight of the pensions in this country that is causing this concern?
Probably.
But there is a solution to all this that could not only remove this fear, but also dramatically improve the lifestyle of all concerned.
What is this solution?
Most people are brought up to believe that their main goal in life is to own their own house, and have fully paid for it by the time they retire.
Why?
What is the point in just scrimping and scraping throughout your working life only to have to sell your house and move down market, or worse still, sell up and rent, while you just try and make ends meet on a pitifully small handout from the State?
As soon as you have bought your first house, you should be thinking about buying your second and your third, and your fourth…..
“What on earth for” , will be the retort of most of you, “ we can only just afford the repayments on the first one, let alone buy any more”
Let’s look at the way most people buy a house, and then lets look at some alternative methods.
The usual way of acquiring a house is to put down a large deposit – somewhere in the region of 10 – 15%, which on an average £200,000 house will equate to around £30,000.
The next route is to take out a repayment mortgage over a fixed term, say 15 to 25 years, where you will be paying a combination of interest on the outstanding loan, as well as repaying the capital.
On top of this, most people will take out some other financial facility, such as an endowment policy coupled with a life insurance policy for the period of the mortgage, so at the end of the mortgage term, they will not only own the house outright, but also have a lump sum. Not a very large lump sum, as a lot of the insurance premiums would have gone towards the life cover purchased.
Now, we have all seen how endowments have failed terribly of late due to overoptimistic performance, so there is no guarantee that the above route wil produce anything other than a tremendous financial drain on this person for a very large period of their lives, and with no real plan for their future except ownership of a house, a small endowment, and probably a ridiculously low pension to keep them going in their retirement years.
However, there is another way. Interested? Then read on….
Let’s look at a totally different scenario, where the couple looking to buy their first house took specialist advice from one of the more reputable property clubs that are around. These clubs are admittedly usually aimed at property investors, but isn’t that what we all should be?
Now, let’s take our example of the £200,000 dream house for our hopeful house buyers. They see a development of dream houses by one of the nationally recognised house builders. Do you think they could persuade the developers to pay the 15% deposit for them? On their own – not a chance, but if our hopefuls go via one of these property clubs, the chances are that the developer would now be willing to pay the 15% as a ‘gift’.
I can see your expression now. “Not a chance” you say. But it does happen, and we can arrange introductions to make this possible.
So, you now have bought your house, and instead of having to find £30,000 deposit, al you have to do is get your self a mortgage.
Now, when you move into a house, especially in your early years, the chance of you staying there for the term of the mortgage is very unlikely. You may change jobs; you may want to move to a different area, or there may be many other reason why you will want to move within a few years. So, the house you have bought is only a temporary residence, and you could almost treat it as a rental property – but with one big big difference.
Whether you paid the deposit, or whether you got this ‘gifted’ deposit from the developers, this money, this equity in the property is YOURS. And not only that, it is a historical fact that house prices, given time, will always increase.
So as this is a ‘temporary’ abode, why go for a mortgage that includes a repayment element in it? Why not go for what is known as an interest only mortgage? What this is then is a loan where you never pay back any of the principle of the loan, but only the interest on it. You will have to pay back the capital at the end of the term, but we will be showing you how easy that can be achieved a little bit later.
Your situation now is that you are paying the barest minimum mortgage repayment, but are also sitting on a considerable amount of INCREASIING equity! You do not have to pay for an expensive endowment policy, although a life policy may well give your other half a comfort blanket.
But now look at another effect, which is called ‘Leverage’. With a no-money down deal, the leverage is enormous, but consider the case where you bought a £200,000 house and put a 10% (£20,000) deposit down on it. If the house goes up in value by 10% the equity in your house will have increased by some £20,000. Now, your initial investment was £20,000, so you will have DOUBLED your investment in 12 months. Not bad huh! Try doing that at your local Bank, or even if you dare, the Stock Market!
So, let’s say house prices went up by just 5% per annum over the next 2 years. This would mean an increase in your equity (equity being the difference between the value of your house and the amount of the mortgage on it). This would mean you now owned an extra £10,000 after the first year (5% of £200,000) and £21,000 after the second year (5% of £210,000 + £10,000 from the previous year). This would mean that your house was now worth £221,000, of which you now owned (£221.000 - £170,000) which comes to some £55,100.
Wow! £55 Grand that belongs to you!
Now, let’s do something with this money!
With a good clean credit record after the last 2 years (assuming you had no defaults on your mortgage payments) you could now refinance your house. You could go to your existing lender (if you have a penalty period in your mortgage), or you could go to any other lender and negotiate up to 90% (subject to your financial status) of THE NEW VALUE OF YOUR HOUSE.
90% of £221,000 is £198,900. So you can release nearly £30,000 out of the equity in your house. And the best thing about this money is it is totally tax free! No capital gains to pay and no income tax! If you don’t believe me, speak to an accountant.
Many people have in fact done this, but have then spent the money on new cars, boats, holidays and the like, but once the money is spent in this fashion, it is gone for ever.
But how about if you went and bought another house, this time as an investment property?
You never know, your friendly developer may be persuaded to give you another gifted deposit, in which case you could buy several more houses (your only expense being legal fees, broker’s fees, and stamp duty, which on a £200,000 property would come to around £5,000). In this case, with your £30,000 you could buy another 6 houses!
But how do you go about buying all of these houses? And how, if they all have £170,000 mortgages on them are you ever going to meet the repayments. Assuming an interest rate of 5%, that would be about £700 per property per month! £4,200 per month mortgage! Heaven forbid. How would you sleep at night with that level of debt to your name?
Some years ago this would have been impossible as there was no real financial system that would enable an individual to do this. However, now, you can get what is known as a ‘Buy To Let’ mortgage, where lenders will usually lend up to 85% of the property in question, as long as the anticipated rental income will cover the repayments , plus a bit. The ‘plus a bit’ tends to vary from lender to lender, but you can very quickly get an answer from lenders on whether they will meet the loan. Also, if you are going to get a ‘gifted deposit’, there are only a few lenders who will offer 85% of the list price, so once again, you will need to use a property club or a broker who is used to this situation.
So, you are now the lucky owner of 6 investment properties, as well as your own house.
You also have a commitment to pay 6 investment mortgages as well, and we totalled that as being some £4,200 a month!
But – you don’t want to have to pay that do you? No! You get tenants in, who very kindly pay the mortgage for you (plus a bit for your pocket and 10% or thereabouts for a managing agent to look after the tenants). You can also take out insurances to cover loss of rent, damage, legal fees on disputes, so it is eminently possible for you to become an ‘armchair’ investor landlord.
However, you now own 6 investment houses, not one. You have already seen how equity can build up in your own house. So let’s look at each of your investment properties.
If each property was worth £200,000, and you got a 15% gifted deposit on each one, you are already looking at an equity of some £30,000 in each unit.
If each property increased in value by just 5% per annum, that’s £10,000 from every unit.
Just look what you would be gaining. You would now own a property portfolio of 6 investment properties worth £1.200,000 of which you would have instant equity of around £180,000, and this would be increasing (at just 5%) of some £60,000 every year. Without compounding this increase, if you sold all of your investment properties after 10 years, you would walk away with well over THREE QUARTERS OF A MILLION POUNDS!
So, do you still believe that – whatever the cost – your main objective in life is to pay off your mortgage?
By all means, have this intention – but only after you have made so many other gains that you can really afford this luxury.
Geoff Morris has built up a multi-million pound property portfolio in less than 18 months. He has written a number of articles aimed to help others follow the same path to financial freedom. His free reports and consumer guides can be found at www.propertyprofits4you.com.
by Geoff Morris
Do you still believe that your main objective in life is to pay off your mortgage?
Many people these days are getting more and more concerned as they approach retirement age. Even those in their late twenties are beginning to become concerned about the effects of old age. What has brought on such a dilemma in those so young? It is the plight of the pensions in this country that is causing this concern?
Probably.
But there is a solution to all this that could not only remove this fear, but also dramatically improve the lifestyle of all concerned.
What is this solution?
Most people are brought up to believe that their main goal in life is to own their own house, and have fully paid for it by the time they retire.
Why?
What is the point in just scrimping and scraping throughout your working life only to have to sell your house and move down market, or worse still, sell up and rent, while you just try and make ends meet on a pitifully small handout from the State?
As soon as you have bought your first house, you should be thinking about buying your second and your third, and your fourth…..
“What on earth for” , will be the retort of most of you, “ we can only just afford the repayments on the first one, let alone buy any more”
Let’s look at the way most people buy a house, and then lets look at some alternative methods.
The usual way of acquiring a house is to put down a large deposit – somewhere in the region of 10 – 15%, which on an average £200,000 house will equate to around £30,000.
The next route is to take out a repayment mortgage over a fixed term, say 15 to 25 years, where you will be paying a combination of interest on the outstanding loan, as well as repaying the capital.
On top of this, most people will take out some other financial facility, such as an endowment policy coupled with a life insurance policy for the period of the mortgage, so at the end of the mortgage term, they will not only own the house outright, but also have a lump sum. Not a very large lump sum, as a lot of the insurance premiums would have gone towards the life cover purchased.
Now, we have all seen how endowments have failed terribly of late due to overoptimistic performance, so there is no guarantee that the above route wil produce anything other than a tremendous financial drain on this person for a very large period of their lives, and with no real plan for their future except ownership of a house, a small endowment, and probably a ridiculously low pension to keep them going in their retirement years.
However, there is another way. Interested? Then read on….
Let’s look at a totally different scenario, where the couple looking to buy their first house took specialist advice from one of the more reputable property clubs that are around. These clubs are admittedly usually aimed at property investors, but isn’t that what we all should be?
Now, let’s take our example of the £200,000 dream house for our hopeful house buyers. They see a development of dream houses by one of the nationally recognised house builders. Do you think they could persuade the developers to pay the 15% deposit for them? On their own – not a chance, but if our hopefuls go via one of these property clubs, the chances are that the developer would now be willing to pay the 15% as a ‘gift’.
I can see your expression now. “Not a chance” you say. But it does happen, and we can arrange introductions to make this possible.
So, you now have bought your house, and instead of having to find £30,000 deposit, al you have to do is get your self a mortgage.
Now, when you move into a house, especially in your early years, the chance of you staying there for the term of the mortgage is very unlikely. You may change jobs; you may want to move to a different area, or there may be many other reason why you will want to move within a few years. So, the house you have bought is only a temporary residence, and you could almost treat it as a rental property – but with one big big difference.
Whether you paid the deposit, or whether you got this ‘gifted’ deposit from the developers, this money, this equity in the property is YOURS. And not only that, it is a historical fact that house prices, given time, will always increase.
So as this is a ‘temporary’ abode, why go for a mortgage that includes a repayment element in it? Why not go for what is known as an interest only mortgage? What this is then is a loan where you never pay back any of the principle of the loan, but only the interest on it. You will have to pay back the capital at the end of the term, but we will be showing you how easy that can be achieved a little bit later.
Your situation now is that you are paying the barest minimum mortgage repayment, but are also sitting on a considerable amount of INCREASIING equity! You do not have to pay for an expensive endowment policy, although a life policy may well give your other half a comfort blanket.
But now look at another effect, which is called ‘Leverage’. With a no-money down deal, the leverage is enormous, but consider the case where you bought a £200,000 house and put a 10% (£20,000) deposit down on it. If the house goes up in value by 10% the equity in your house will have increased by some £20,000. Now, your initial investment was £20,000, so you will have DOUBLED your investment in 12 months. Not bad huh! Try doing that at your local Bank, or even if you dare, the Stock Market!
So, let’s say house prices went up by just 5% per annum over the next 2 years. This would mean an increase in your equity (equity being the difference between the value of your house and the amount of the mortgage on it). This would mean you now owned an extra £10,000 after the first year (5% of £200,000) and £21,000 after the second year (5% of £210,000 + £10,000 from the previous year). This would mean that your house was now worth £221,000, of which you now owned (£221.000 - £170,000) which comes to some £55,100.
Wow! £55 Grand that belongs to you!
Now, let’s do something with this money!
With a good clean credit record after the last 2 years (assuming you had no defaults on your mortgage payments) you could now refinance your house. You could go to your existing lender (if you have a penalty period in your mortgage), or you could go to any other lender and negotiate up to 90% (subject to your financial status) of THE NEW VALUE OF YOUR HOUSE.
90% of £221,000 is £198,900. So you can release nearly £30,000 out of the equity in your house. And the best thing about this money is it is totally tax free! No capital gains to pay and no income tax! If you don’t believe me, speak to an accountant.
Many people have in fact done this, but have then spent the money on new cars, boats, holidays and the like, but once the money is spent in this fashion, it is gone for ever.
But how about if you went and bought another house, this time as an investment property?
You never know, your friendly developer may be persuaded to give you another gifted deposit, in which case you could buy several more houses (your only expense being legal fees, broker’s fees, and stamp duty, which on a £200,000 property would come to around £5,000). In this case, with your £30,000 you could buy another 6 houses!
But how do you go about buying all of these houses? And how, if they all have £170,000 mortgages on them are you ever going to meet the repayments. Assuming an interest rate of 5%, that would be about £700 per property per month! £4,200 per month mortgage! Heaven forbid. How would you sleep at night with that level of debt to your name?
Some years ago this would have been impossible as there was no real financial system that would enable an individual to do this. However, now, you can get what is known as a ‘Buy To Let’ mortgage, where lenders will usually lend up to 85% of the property in question, as long as the anticipated rental income will cover the repayments , plus a bit. The ‘plus a bit’ tends to vary from lender to lender, but you can very quickly get an answer from lenders on whether they will meet the loan. Also, if you are going to get a ‘gifted deposit’, there are only a few lenders who will offer 85% of the list price, so once again, you will need to use a property club or a broker who is used to this situation.
So, you are now the lucky owner of 6 investment properties, as well as your own house.
You also have a commitment to pay 6 investment mortgages as well, and we totalled that as being some £4,200 a month!
But – you don’t want to have to pay that do you? No! You get tenants in, who very kindly pay the mortgage for you (plus a bit for your pocket and 10% or thereabouts for a managing agent to look after the tenants). You can also take out insurances to cover loss of rent, damage, legal fees on disputes, so it is eminently possible for you to become an ‘armchair’ investor landlord.
However, you now own 6 investment houses, not one. You have already seen how equity can build up in your own house. So let’s look at each of your investment properties.
If each property was worth £200,000, and you got a 15% gifted deposit on each one, you are already looking at an equity of some £30,000 in each unit.
If each property increased in value by just 5% per annum, that’s £10,000 from every unit.
Just look what you would be gaining. You would now own a property portfolio of 6 investment properties worth £1.200,000 of which you would have instant equity of around £180,000, and this would be increasing (at just 5%) of some £60,000 every year. Without compounding this increase, if you sold all of your investment properties after 10 years, you would walk away with well over THREE QUARTERS OF A MILLION POUNDS!
So, do you still believe that – whatever the cost – your main objective in life is to pay off your mortgage?
By all means, have this intention – but only after you have made so many other gains that you can really afford this luxury.
Geoff Morris has built up a multi-million pound property portfolio in less than 18 months. He has written a number of articles aimed to help others follow the same path to financial freedom. His free reports and consumer guides can be found at www.propertyprofits4you.com.
Feb 7, 2008
How long does a mortgage last?
How long does a mortgage last?
There is no right length (term) to a mortgage. The standard term is around 25 years, and most of us tend to have a mortgage throughout our working lifetime. With the large sums involved, this spreads the cost and makes your monthly payments more manageable.
However, you can choose a different term if it suits you and the lender agrees that you can afford it. If you can afford a shorter term you may have higher monthly payments but pay less in total. With a longer term, you may pay less each month but more in total.
Try not to make financial commitments that go past the age you retire unless you're sure you'll be able to afford the payments.
There is no right length (term) to a mortgage. The standard term is around 25 years, and most of us tend to have a mortgage throughout our working lifetime. With the large sums involved, this spreads the cost and makes your monthly payments more manageable.
However, you can choose a different term if it suits you and the lender agrees that you can afford it. If you can afford a shorter term you may have higher monthly payments but pay less in total. With a longer term, you may pay less each month but more in total.
Try not to make financial commitments that go past the age you retire unless you're sure you'll be able to afford the payments.
Feb 5, 2008
Are You Missing Out On Endowment Shortfall Compensation?
Are You Missing Out On Endowment Shortfall Compensation?
by Keith Lunt
Millions of pounds of compensation have been paid out by insurance companies. Are you entitled to a share? Could a claim now help to get your mortgage repayments back on track for the future? But you must act quickly - insurance companies are only allowing claims for a limited time.
If you took out an endowment insurance policy with an interest only mortgage after April 1988, it is highly likely you were one of the millions of victims of Endowment Misselling.
It is possible that you have received a letter from your endowment company warning you that your endowment investment is not on track to pay off your mortgage and advising you to find alternative means to pay off your mortgage. This is called a "Red Letter" and from the date this is sent you only have three years to claim compensation.
If you were told the policy would certainly pay off your mortgage or were promised an extra lump sum at the end of the mortgage or have had to make extra contributions to keep it on track, then it's likely that you could successfully claim.
Endowment policies should have been sold to customers willing to accept the risks involved with them. If you are normally a careful or cautious investor then a less riskier repayment mortgage would possibly have been better for you. There always was a risk that your endowment would not cover the mortgage, but had you known about that risk at the time would you have still taken out a policy?
If the answer is "no", then you should not have bee sold the policy - you are a victim of misselling. Instead of an interest only mortgage, you should have been offered a standard repayment mortgage.
Finding out whether a claim is worthwhile progressing is quite painless - just contact a suitable solicitor. Many have tools on their websites that will quickly allow you to determine whether a claim might succeed and this, as well as talking to the solicitor is normally free.
If you might have a claim the solicitor will help you through the paperwork and deal with the insurance company for you. They will also check your compensation and make sure that the offer is correct.
If you want to know whether you can claim, look at www.endowment-claim.org.uk. It only takes a minute to find out the answer or you can just leave your contact details and someone will call you back.
Keith Lunt runs several financial sites including www.endowment-claim.org.uk.
by Keith Lunt
Millions of pounds of compensation have been paid out by insurance companies. Are you entitled to a share? Could a claim now help to get your mortgage repayments back on track for the future? But you must act quickly - insurance companies are only allowing claims for a limited time.
If you took out an endowment insurance policy with an interest only mortgage after April 1988, it is highly likely you were one of the millions of victims of Endowment Misselling.
It is possible that you have received a letter from your endowment company warning you that your endowment investment is not on track to pay off your mortgage and advising you to find alternative means to pay off your mortgage. This is called a "Red Letter" and from the date this is sent you only have three years to claim compensation.
If you were told the policy would certainly pay off your mortgage or were promised an extra lump sum at the end of the mortgage or have had to make extra contributions to keep it on track, then it's likely that you could successfully claim.
Endowment policies should have been sold to customers willing to accept the risks involved with them. If you are normally a careful or cautious investor then a less riskier repayment mortgage would possibly have been better for you. There always was a risk that your endowment would not cover the mortgage, but had you known about that risk at the time would you have still taken out a policy?
If the answer is "no", then you should not have bee sold the policy - you are a victim of misselling. Instead of an interest only mortgage, you should have been offered a standard repayment mortgage.
Finding out whether a claim is worthwhile progressing is quite painless - just contact a suitable solicitor. Many have tools on their websites that will quickly allow you to determine whether a claim might succeed and this, as well as talking to the solicitor is normally free.
If you might have a claim the solicitor will help you through the paperwork and deal with the insurance company for you. They will also check your compensation and make sure that the offer is correct.
If you want to know whether you can claim, look at www.endowment-claim.org.uk. It only takes a minute to find out the answer or you can just leave your contact details and someone will call you back.
Keith Lunt runs several financial sites including www.endowment-claim.org.uk.
Feb 4, 2008
What You Need To Know About Endowments and Endowment Shortfalls
What You Need To Know About Endowments and Endowment Shortfalls
by David Miles
Endowments and endowment mortgages have received a lot of bad press in recent years, amid concerns over falling policy values and accusations of endowment miss-selling.
This article attempts to answer some of the questions and concerns you may have about the way endowments work, what's happening to them, and what you can do to ensure your mortgage is paid off at the end of the term if you have an endowment mortgage.
What is an endowment mortgage?
There are two basic types of mortgage. The first is a repayment mortgage, where you make one monthly payment to the lender which is part interest and part repayment of the original capital.
Then there are interest-only mortgages, where your monthly payment to the lender is just the interest on the original loan and the mortgage debt remains unchanged. You then make separate payments into an investment scheme (such as an endowment), with the idea being that at the end of the mortgage term this investment will have grown sufficiently to repay the mortgage.
An online mortgage calculator can give you an idea of the difference in payments to your lender between an interest-only mortgage and a repayment mortgage.
Interest-only endowment mortgages were very popular in the 1980s and 1990s and were often chosen in the belief that the endowment would end up being large enough to clear the mortgage and still leave a tidy sum of money left over as a bonus.
How do endowments work?
An endowment is a long-term savings policy, typically running for ten to twenty-five years. An endowment plan has what is known as a "sum assured" value. If the policyholder dies during the life of the endowment, it pays out the sum assured. In the case of endowments linked to mortgages, the sum assured is equal to the size of the mortgage. The payout in the event of the death of the policyholder is guaranteed but, if the policyholder survives, the final value of the endowment at the end of its term is not guaranteed.
Endowments can be unit linked, which means that you buy units in a fund, or they can be "with profits".
How does money grow in a with profits endowment?
There are two ways in which a with profits endowment can increase in value. Firstly, the insurance company may add a bonus to your policy each year. This is known as a reversionary bonus and is usually a percentage of the amount of profit made by the fund over the previous years.
The amount added in this way may only be a small amount. However, once added, these bonuses cannot be taken away - hence the name reversionary bonus - and will belong to you when the policy matures.
Then there is the terminal bonus. This is a separate sum of money which the insurance company can add to your endowment policy when it matures. These terminal bonuses are discretionary and may not be applied at all.
What are the advantages of with profits endowments?
The idea of a with profits endowment is to smooth out fluctuations in the stockmarket.
With a non-with profits endowment, your investment is linked 100% to the stockmarket. Therefore, there is always the possibility that the investment value could fall just at the time when you need the money.
By using with profits endowments, insurance companies get round this problem by giving you a slightly smaller percentage of any fund growth as an annual bonus and try to smooth out future annual bonus declarations.
The point of this is to try to ensure that, no matter what happens to the returns of the fund, you are guaranteed a certain minimum amount when then endowment policy matures.
Why don't you get the entire year's gains as a bonus?
On the one hand, the insurance companies and their fund managers want you to have as much security as possible - hence the reversionary bonuses which cannot be taken away at a later date.
On the other hand, they are also trying to maximise long-term growth by investing your money in stocks and shares, property, gilts, and cash. All of these involve a degree of risk.
What is the problem with endowments?
Anyone taking out an endowment policy, whether on a with profits or unit linked basis, has to be given a written illustration by the insurance company of how much the policy might be worth at maturity. When providing these illustrations, insurers have to make an assumption as to the rate of growth per annum that will apply to the money you are paying into the endowment. This assumed rate is known as the projected rate, and there is no guarantee that this rate will be met in reality.
Until a few years ago, the projections were usually based on a mid-range growth rate of 7.5% per annum. In the early 1980s, the assumed growth rates used in the illustrations were even higher. Therefore, the monthly endowment premiums were low by today's standards, because they were set to reflect these high projected growth rates.
Interest rates and other economic factors, such as stock market growth and interest rates, are much lower now than they were in the 1980s and 1990s, so it has now been necessary to reduce projected rates of growth for people taking out a new endowment policy today. As a result, the monthly premiums for a new endowment policy today will be higher than they were in previous decades.
How does this affect existing policyholders?
Because actual growth rates have been lower than the projected 7.5% rate, an endowment policy taken out in the 1980s or 1990s may now not be worth enough at maturity to pay off the interest-only mortgage to which it is linked.
Insurance companies are therefore assessing the state of people's policies and contacting them to advise what action they should take now to avoid a potential shortfall at the end of their mortgage.
How will I be affected?
In most cases, if you took out a with-profits endowment in the mid-1980s or earlier, the fund should be sufficient at maturity to pay off the mortgage. This is because the money in your endowment policy will have benefited from the higher rates of interest and better stock market growth of the 1980s.
But, the shorter the length of time your endowment has been running, the greater the potential for a shortfall at maturity.
It is impossible to predict exactly how large this shortfall may be, as so much depends on future fund performance between now and the time when your endowment matures. Insurance companies are trying to assess the issue by looking at how much has been accumulated in your fund so far and making more conservative estimates about future growth.
What can I do now?
There are a number of options:
Which is the best option?
Everyone's situation is different, and everyone has their own particular preferences. If you are unsure what to do, you should take professional mortgage advice to help you review your options and come to a decision as to what to do.
Should I just cash in my endowment?
This would almost certainly be a mistake. Many endowment policies are structured such that the management charges are highest in the early years. If you surrender the policy early on, the amount you get back may well be less than the amount you have paid in up until now.
Also, you need to bear in mind that a large proportion of the final value of a with profits endowment depends on its terminal bonus. The size of this bonus will not be known until the policy matures.
So, the best strategy is normally to keep the endowment in place. If you need to cut down on your monthly outgoings, you can leave a policy "paid up" (although you may incur penalties for doing this). This means that you do not pay any more money into the endowment, but leave it to mature on the original date for a lower amount. If you do this, you will need to make sure you still have sufficient life cover to protect your mortgage.
It is possible to sell endowment policies on the second-hand endowment market. The amount you get will depend on the policy and how long it has left to run. Again, this is an area where you would be well-advised to talk to a professional before taking any action.
David Miles is the editor of a number of personal finance websites including UK Mortgages & Remortgages and The Cash Clinic - a UK Personal Finance Portal.
Please note that this article is for general guidance only and does not constitute financial advice. You should seek professional advice with respect to your own specific circumstances.
by David Miles
Endowments and endowment mortgages have received a lot of bad press in recent years, amid concerns over falling policy values and accusations of endowment miss-selling.
This article attempts to answer some of the questions and concerns you may have about the way endowments work, what's happening to them, and what you can do to ensure your mortgage is paid off at the end of the term if you have an endowment mortgage.
What is an endowment mortgage?
There are two basic types of mortgage. The first is a repayment mortgage, where you make one monthly payment to the lender which is part interest and part repayment of the original capital.
Then there are interest-only mortgages, where your monthly payment to the lender is just the interest on the original loan and the mortgage debt remains unchanged. You then make separate payments into an investment scheme (such as an endowment), with the idea being that at the end of the mortgage term this investment will have grown sufficiently to repay the mortgage.
An online mortgage calculator can give you an idea of the difference in payments to your lender between an interest-only mortgage and a repayment mortgage.
Interest-only endowment mortgages were very popular in the 1980s and 1990s and were often chosen in the belief that the endowment would end up being large enough to clear the mortgage and still leave a tidy sum of money left over as a bonus.
How do endowments work?
An endowment is a long-term savings policy, typically running for ten to twenty-five years. An endowment plan has what is known as a "sum assured" value. If the policyholder dies during the life of the endowment, it pays out the sum assured. In the case of endowments linked to mortgages, the sum assured is equal to the size of the mortgage. The payout in the event of the death of the policyholder is guaranteed but, if the policyholder survives, the final value of the endowment at the end of its term is not guaranteed.
Endowments can be unit linked, which means that you buy units in a fund, or they can be "with profits".
How does money grow in a with profits endowment?
There are two ways in which a with profits endowment can increase in value. Firstly, the insurance company may add a bonus to your policy each year. This is known as a reversionary bonus and is usually a percentage of the amount of profit made by the fund over the previous years.
The amount added in this way may only be a small amount. However, once added, these bonuses cannot be taken away - hence the name reversionary bonus - and will belong to you when the policy matures.
Then there is the terminal bonus. This is a separate sum of money which the insurance company can add to your endowment policy when it matures. These terminal bonuses are discretionary and may not be applied at all.
What are the advantages of with profits endowments?
The idea of a with profits endowment is to smooth out fluctuations in the stockmarket.
With a non-with profits endowment, your investment is linked 100% to the stockmarket. Therefore, there is always the possibility that the investment value could fall just at the time when you need the money.
By using with profits endowments, insurance companies get round this problem by giving you a slightly smaller percentage of any fund growth as an annual bonus and try to smooth out future annual bonus declarations.
The point of this is to try to ensure that, no matter what happens to the returns of the fund, you are guaranteed a certain minimum amount when then endowment policy matures.
Why don't you get the entire year's gains as a bonus?
On the one hand, the insurance companies and their fund managers want you to have as much security as possible - hence the reversionary bonuses which cannot be taken away at a later date.
On the other hand, they are also trying to maximise long-term growth by investing your money in stocks and shares, property, gilts, and cash. All of these involve a degree of risk.
What is the problem with endowments?
Anyone taking out an endowment policy, whether on a with profits or unit linked basis, has to be given a written illustration by the insurance company of how much the policy might be worth at maturity. When providing these illustrations, insurers have to make an assumption as to the rate of growth per annum that will apply to the money you are paying into the endowment. This assumed rate is known as the projected rate, and there is no guarantee that this rate will be met in reality.
Until a few years ago, the projections were usually based on a mid-range growth rate of 7.5% per annum. In the early 1980s, the assumed growth rates used in the illustrations were even higher. Therefore, the monthly endowment premiums were low by today's standards, because they were set to reflect these high projected growth rates.
Interest rates and other economic factors, such as stock market growth and interest rates, are much lower now than they were in the 1980s and 1990s, so it has now been necessary to reduce projected rates of growth for people taking out a new endowment policy today. As a result, the monthly premiums for a new endowment policy today will be higher than they were in previous decades.
How does this affect existing policyholders?
Because actual growth rates have been lower than the projected 7.5% rate, an endowment policy taken out in the 1980s or 1990s may now not be worth enough at maturity to pay off the interest-only mortgage to which it is linked.
Insurance companies are therefore assessing the state of people's policies and contacting them to advise what action they should take now to avoid a potential shortfall at the end of their mortgage.
How will I be affected?
In most cases, if you took out a with-profits endowment in the mid-1980s or earlier, the fund should be sufficient at maturity to pay off the mortgage. This is because the money in your endowment policy will have benefited from the higher rates of interest and better stock market growth of the 1980s.
But, the shorter the length of time your endowment has been running, the greater the potential for a shortfall at maturity.
It is impossible to predict exactly how large this shortfall may be, as so much depends on future fund performance between now and the time when your endowment matures. Insurance companies are trying to assess the issue by looking at how much has been accumulated in your fund so far and making more conservative estimates about future growth.
What can I do now?
There are a number of options:
- 1. You can increase payments into your existing endowment policy (subject to Inland Revenue rules), or take out additional endowment policy with the same insurer or a different insurer. However, you may decide you don't want to be tied into another endowment.
- 2. You can ask to extend the term of your endowment policy, subject to your mortgage lender agreeing. This is probably not a good idea if it means your policy would continue beyond your retirement age.
- 3. You can set up an additional investment, such as an individual savings account (ISA). An ISA may be cheaper and can offer a wide range of investment choices to suit your attitude to risk.
- 4. You can ask your mortgage lender to switch part of your mortgage (equivalent to the projected shortfall on your endowment) to a repayment mortgage. You can get an idea of the costs of the new repayment part of your mortgage by using an online mortgage calculator.
- 5. You can use any other spare lump sum to pay off part of your mortgage. You will need to check first to see if this would make you liable for any early redemption penalties from your lender.
Which is the best option?
Everyone's situation is different, and everyone has their own particular preferences. If you are unsure what to do, you should take professional mortgage advice to help you review your options and come to a decision as to what to do.
Should I just cash in my endowment?
This would almost certainly be a mistake. Many endowment policies are structured such that the management charges are highest in the early years. If you surrender the policy early on, the amount you get back may well be less than the amount you have paid in up until now.
Also, you need to bear in mind that a large proportion of the final value of a with profits endowment depends on its terminal bonus. The size of this bonus will not be known until the policy matures.
So, the best strategy is normally to keep the endowment in place. If you need to cut down on your monthly outgoings, you can leave a policy "paid up" (although you may incur penalties for doing this). This means that you do not pay any more money into the endowment, but leave it to mature on the original date for a lower amount. If you do this, you will need to make sure you still have sufficient life cover to protect your mortgage.
It is possible to sell endowment policies on the second-hand endowment market. The amount you get will depend on the policy and how long it has left to run. Again, this is an area where you would be well-advised to talk to a professional before taking any action.
David Miles is the editor of a number of personal finance websites including UK Mortgages & Remortgages and The Cash Clinic - a UK Personal Finance Portal.
Please note that this article is for general guidance only and does not constitute financial advice. You should seek professional advice with respect to your own specific circumstances.
Subscribe to:
Posts (Atom)