A client came to me recently in a panic.
They had an interest-only mortgage attached to an endowment investment policy and were just realising that when it paid out, the policy wasn’t going to come anywhere near paying off the loan.
Sadly their circumstances were by no means unique.
Way back in the 1980s, endowment mortgages were all the rage with financial advisers falling over themselves to sell you one. The promise was that the endowment policy would perform so well that it would return enough money on maturity to pay off your loan and give you a “healthy profit” too!
However, the policies failed to make anywhere near the returns that were promised. A MoneyMail investigation revealed that payouts in some cases were as much as 78% less than promised when a policy was taken out 25 years ago.
In one case, a promised £110,000 return ended up paying just over £23,000.
Endowment mortgages are no longer sold, but that is no consolation to anyone with a big interest-only mortgage and no obvious means to pay it off, now that the endowment has under-performed
To be fair most insurers do write to homeowners warning them of an impending shortfall, but it is little comfort to be urged to make “alternative arrangements” to pay off the loan.
So what can my client do?
There are lots of different options – the most drastic of which is to sell your home to pay off the loan!
If that doesn’t appeal – and why should it? – then there are other ways.
You can dip into your savings, like your pension pot, to fill the gap between the endowment payout and the loan.
Some people look at equity release – a plan where you take out some of the value of your home – to pay off the shortfall. The downside being that your home is obviously worth less either if you sell it later or leave it in a will.
If you have a bit longer left on your mortgage you might be able to switch it to a repayment loan, where you are paying off the debt as well as the interest. Some people overpay on their repayments to help clear the debt quicker whilst for others only converting a proportion of their mortgage to a repayment helps keep payments affordable.
You might think about cashing in the endowment policy to pay off a chunk of the loan – though watch out for leaving penalties.
Another alternative is to see if your lender will extend your mortgage to give you more time to make the repayments. Some lenders will let you go to age 75 to pay off a repayment mortgage. Even if your lender won’t, there are others who will.
Whatever the solution is it certainly isn’t burying your head in the sand and hoping the problem will go away.
As with all these things, it is worth checking exactly what mortgage you have in place. It might be some years since you took it out and you might not realise that it is an interest-only mortgage, relying on an investment to pay it off. If it is, the faster you react, the better.
For a free, no obligation discussion on any mortgage or insurance issue, please give me a call on 07767 692653.