Investments for your mortgage
During the 1980s and 1990s millions of homebuyers were advised by mortgage brokers to set up endowment policies if they were taking out an interest-only mortgage. Whereas a repayment mortgage will cover both the interest and the amount you have borrowed, an interest-only mortgage only covers the interest charged on the mortgage. This means that at the end of the mortgage term, the homeowner will need to pay back the amount originally borrowed. Interest-only mortgages were sometimes linked to pension schemes or Individual Savings Accounts (ISAs) but the most common investment 'vehicle' set up to cover the capital debt for interest-only mortgages were endowments.
- Many people took them out alongside interest-only mortgages in the hope that at the end of the term, the cash value would be enough to pay off the loan in full.
- Endowments provide an investment with an element of life cover.
- In reality, they are risky investments and some homeowners have been left out of pocket.
- If you think you were mis-sold an endowment policy, you may be able to claim for compensation.
- Insurance companies must regularly review all policies and update policyholders on investment performance.
- You can trade in or sell your endowment – but at a price.
Most people bought the policies alongside interest-only mortgages, expecting that, when the endowment term came to an end, its cash value would be enough to pay off the capital part of the mortgage with a lump sum left over. On the plus side, endowments provided an investment which included an element of life cover so the debt would be covered in the event of death before the end of the term. They also appealed for their tax-free premiums (the tax incentives no longer apply) and a bonus on maturity.
In reality, endowments are incredibly risky investments and rely on considerable stock market growth to experience such a rise in value. If an endowment doesn't reach its target value, homeowners are left to make up the shortfall. It's thought that around five million endowments were sold that would not meet their target amount. In some cases the homeowners have remortgaged or taken additional investments. However, many people are still relying on insufficient endowment investments to pay off their mortgages.
If it's possible you were mis-sold your endowment you need to act. You could have been mis-sold if you were given inaccurate or missing information about the policy.
Keep a record of all communication between you and the endowment company. If you are not sure who to complain to the Financial Services Ombudsman (FOS) can help, contact them on 0845 080 1800 or 0300 123 9123.
If you think you were mis-sold, write to the company which sold you policy and make a complaint. If they haven't responded within eight weeks, or don't uphold your complaint you can take it to the FOS.
If the endowment company or FOS upholds your complaint, you should be refunded all premiums paid into the policy as well as interest. You should be brought back to the financial position you were in before you took out the endowment.
Insurance companies are now required by regulators to regularly review all endowment policies and write to all policyholders every two years to update on investment performance and, highlight any likely shortfall.
Insurer reviews on endowments will fall into one of three categories:
Green: when the policy is on track at the moment to meet its target investment amount at maturity
Amber: when there is a significant risk that the policy will not meet its target level.
Red: when there is a high risk that the policy will fail to meet its target amount.
Don't panic if you get a red review, but you will need to consider other arrangements for your mortgage if you were banking on the policy to pay it off.
Insurance companies are not allowed to give advice on policies to their policyholders, but they should outline your options. You can also get impartial advice from an Independent Financial Adviser (IFA).
Just because you have received a red report on your policy, don't automatically assume that getting rid of the policy is the best option. Thanks to hefty surrender penalties, which mean the amount paid out can be less than the amount paid in, you can't just take the money from underperforming policies early and run.
Unfortunately, usually the best option with disappointing endowments is also the most galling: to keep the policy and continue paying in. While the investment might not have performed as well as originally hoped, the payout will usually be higher than if you surrender or sell it.
Selling your endowment
However, if you're adamant you don't want to keep you languishing policy, or are finding the premiums a struggle, consider trading in your endowment rather surrendering it. Many companies will offer to buy the policy at a higher price than sum offered to surrender – you can expect between 2% and 15% more. Endowment policies sold are known as Traded Endowment Policies (TEPs).
Why would anyone want to buy a policy when it's performed so badly you might ask? The policies are bought by investors who will take over repayments hoping to turn a profit when the investment matures. Most with-profit endowments grow quickly near the end of their term, particularly if there are terminal bonuses. This is also why you should consider keeping your endowment if you can.
The new policyholder also receives your life insurance payout when you die. Therefore, you should also make additional arrangements for life cover if you sell your endowment policy.
If you are having cash-flow problems, rather than cashing in the policy, you can take a loan against it. The debt must be paid back with the payout from the endowment when it matures. If you were hoping that the endowment would pay off your outstanding mortgage, you will have to think carefully before following this option. There may be other borrowing options that are more suitable for your circumstances - if in doubt seek independent advice.
Another option is to keep the policy but stop paying premiums into your plan. The payments are taken from the value of the investment fund, eroding its worth. Any value left when the policy matures is paid to you.
Alternatively, you could ask for a premium holiday which allows the policyholder to take a break from paying off the premium. To find out whether this is a possibility, you must speak to your insurer or life office.
- Endowments were often taken out with interest-only mortgages
- If you were mis-sold a policy you may be entitled to compensation
- Trading in or selling an endowment comes at a price
You don't need a claims management company to get compensation back for you