Endowment? No, Try an ISA Mortgage instead (General Comments in general)

Member Name: FORCHARITY

Product:	General Comments in general
Date:	18/10/02 (201 review reads)
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Currently, eight million homeowners have mortgages that depend on an Endowment Policy to pay off their loan. But Insurance Companies now reckon that up to five million of these policies might not grow enough to clear the mortgage after 25 years.

In my opinion, if that is what the Insurance Companies reckon, then I conclude that the true figure will be much higher. Even where the policies may pay off the debt, then I guess this will be for those policies taken out, say over 20 years? ago and where the home-owner had been anticipating a large surplus from the policy in addition to the receipt of sufficient capital to pay off their debt.

It is of course the massive decline in the stock market over the past two years, and the consequent decline in the annual and terminal bonuses for Endowment Insurance Policies which has caused this crisis. This means that those who took out policies to pay off their mortgages are generally now extremely worried, as they receive notices from their Insurance Companies or Mortgagers. The Consumers Association (from Stage Left) are now murmuring that many will have claims for being ?miss-sold? such policies.

In reality, I have little sympathy for those who receive these notices from their insurers/mortgagers warning them that the investment plans that they were sold now appear to be failing to match their predicted performance criteria. These criteria were always, in my opinion, challengeable, and the companies are generally protected by the small print warnings that ?Past Performance cannot be guaranteed for future performance?, or summit similar.

Those with memories of the stock market slumps in 1974 and in 1987 could easily predict that another was always ?just around the corner?, and that growth predictions from any investment term are always time-sensitive.

FACTFILE
OK, for those who don?t know the facts, here goes.

With an Endowment Mortgage, you do not repay any of
the capital you borrow during the term of the loan. Instead, the endowment policy is supposed to grow to produce the lump sum you need to repay the loan in full at the end of the pre-agreed period, normally 25 years. Your monthly payments are made up of interest on your mortgage loan and the premium for the endowment. Within the package you also pay for life insurance which will repay the loan if you die.
~What is the big drawback? ~
That there is no guarantee that your endowment will pay off your mortgage. This is not the case with the traditional repayment method.
~What is the point of an endowment then? ~
An endowment MIGHT grow to more than you need to repay your loan, so giving you an extra bonus to spend on anything you like. But the world has changed dramatically against endowments so this is far less likely to happen nowadays. When they first became popular, in the early 1980s, inflation was roaring ahead, interest rates were high and you got tax relief on premiums paid to an endowment. So the sums worked in favour of endowment mortgages - they looked like great ways to repay home loans.
~What has changed? ~
Tax relief on endowment premiums vanished years ago and inflation and interest rates have fallen hitting investment growth. Many people are finding that their endowments won't produce enough to repay their loans after 25 years, let alone produce any hoped-for surplus.
~So why did people buy them?~
Because home loan firms, Building Societies and middlemen such as estate agents got large commissions for selling them. The charges are always 'front-loaded', so that most of the commission is paid up front and so for several years you will get little if anything back if you do have to stop paying the premiums.
~But how likely is this? ~
Statistically very likely. Only one in three endowments reaches their maturity date. The rest, for whatever reason are cashed in early - with the customers mostly getting
back less than they have paid in.
~So I need to keep paying the premiums? ~
The general recommendation is that you should. On average around half of the total payout on an endowment comes on the last day. This is the so-called terminal bonus*, which is not guaranteed, but makes up a large amount of the total payout. Stop paying in before then and you are likely to lose this. Instead, you will only get the benefit of the annual - or reversionary - bonuses which are added to your policy. However, many Insurers have now stopped selling endowment policies, and ?closed their books? on them. The likely implication for this is that, with no new policies being sold, future growth will be stifled, and you may be best just getting out ?either cashing in the policy, or making it into a ?paid-up policy?, so that you will collect a greater sum when the policy matures, whilst at the same time stopping any more premiums being paid.
~What if my endowment firm tells me the policy is not growing fast enough to repay my loan as planned? ~
Millions of people have been told this recently. Often people are advised to make extra monthly contributions to the endowment, though this can feel like throwing good money after bad. If your lender says you need to pay an extra £50 a month, for example, you could pay it into an ISA instead and use the money you make there to top up any shortfall produced by your endowment when your mortgage matures.


The Gee Family Experience
From our experience with the Nationwide Building Society in 1996, I would, however reckon that ALL Endowment Mortgages were being blatantly miss-sold then.

It was back in 1996 when we bought a flat for our elder daughter to use whilst at Edinburgh University for her 4 year course. This was bought in her name and we had decided to put down a deposit of up to £40,000. Thus, getting a mortgage in her name for up to £40,000 was never going to be a problem and there was no way that w
e were going to pay any finders? fee or commission to a broker to produce a good mortgage option. We examined the various options that were available, and decided that the Nationwide Building Society was worth a look.

Our daughter had held an Investment Account at the local branch for at least 4 years, and there was (and still is) the potential for this Mutual to become ?de-mutualised?. If this does happen, then that will be giving her a second tranche of shares.

So when we had decided which property we were buying (purchase price £74,000) we toddled down to our local branch. With such a large deposit (£34,000), we were received with ?open arms?, a mortgage offered immediately and we were told of all the benefits that we were ?entitled? to. I had already decided that we would use a Building Society Repayment Mortgage (tax relief was then still available) with the mortgage in our daughter's name. The Manager confirmed that there was no objection to rooms being let out in the flat, but insisted that Heather & I would have to act as ?guarantors? in view of our daughter?s lack of regular income. That was not a problem, but there was a little legal expense in drawing up a document agreeing to this.

An interest rate of 1.25% was charged for the first year, the valuation fee that we had already paid was refunded and a cheque for £350 was also given to our daughter to help with the legal fees at the conclusion of the business. Oh happy days!!!

My only criticism of the Nationwide was the vehemence with which they pursued us to try and get the mortgage agreed as an Endowment Mortgage. After the Manager had agreed the mortgage of £40,000, in principle, he insisted that we must see the Branch?s ?Financial Adviser? (?Jill?) and an appointment was made for the next afternoon. Here we anticipated a hard-sell on the Society?s insurance policies. We had already decided to use the Nationwide Buildings Insurance (because with room
s let out to other students, which the Manager had agreed to, this would eliminate any problems with claims should the really unfortunate happen). We had also decided to go for a ?critical illness? insurance policy for the debt (for which we would ?shop around?).

Under NO circumstances would an Endowment Mortgage have suited. There was no intention of allowing the mortgage to go for the full 25 years term - the time could have been as short as 4 years. and unlikely to be more than 8 years (this allowing for our son to attend the same University of Edinburgh for a 5 year course). Our daughter then had plans of working abroad when she graduated (and still has for when she qualifies as an Accountant), so she would want complete financial flexibility.

We explained all this, but did this discourage this ?Jill?? Not in the least!! She continued to ?recommend? the Nationwide Unit Trust based Endowment plan as our ?best option?, claiming a ? conservative 6%? annual appreciation for the units, and producing figures which would show a marginally cheaper monthly payment over the repayment mortgage. She used the (middling-but-still-good) performance of this plan over the previous 12 months to demonstrate its ?effectiveness?.

When we politely refused to be drawn to this particular ?plan of action?, she asked ?Why not?? ? In other words demanding us to justify our decision.

Our daughter is quite adamant that if I had not been ?pulling the strings?, then she would have accepted the sales-pitch and signed up to an Endowment-linked plan. We were left with the distinct impression that this "Financial Adviser" was suggesting that we were some kind of idiots for rejecting this option. With the commission on the policy being ?retained? by the Nationwide, PLUS the regular payment of interest on the FULL AMOUNT of the loan, it was no wonder the Building Society was ?pushing? this option

I went to the extent of complaining a
bout her behaviour to the Nationwide Head Office after the mortgage was in force, pointing out that we had already explained the circumstances under which we were taking out the loan, and that there was no way that an endowment mortgage would have suited our daughter?s personal circumstances. All only got denials from the Nationwide, saying that their Financial Advisers were only ?presenting the options?.


~ISA Mortgage Anyone?~
Now the ploy is for an ISA mortgage, and I reckon that this could be the next miss-selling disaster.

Indeed, our younger daughter has a mortgage agreed, in principle with the same branch of the Nationwide Building Society. It is interesting to report that since she has had an account with them since before the bar was introduced on a new member of the society getting shares in the event of a de-mutualisation, then if this does happen, then (to her delight) she will get shares as both an investor and as a borrower. Good News that!

Anyway, when she received her ?personal quotation?, there were two sets of figures given. One for a Repayment Mortgage, and the other for ?interest only? payments. When I queried this with the Manager, he confirmed that our daughter would be obliged to have a meeting with the Branch Financial Advisor (the same ?Jill? again!!!) to discuss ?payment options?. ? Not an Endowment Mortgage surely?, I said. ?No, not Endowments ? have you heard of ISA mortgages??

I played along, and he produced figures based on a 6% annual return, to show how much more effective an ISA Mortgage would be. Now, if he could tell me that the performance of that fund had shown such appreciation over the past 6 years? I await, with baited breath (and a hidden tape recorder), the meeting with Jill again.

As it is, when our elder daughter sells the flat next year, a total of over £7,000 of the mortgage will have been paid off. There is no way that the Endowment policy that the Nati
onwide was wanting to sell us would have had a surrender value remotely approaching that figure.


Some might call it ?Good Luck?. We know that it was ?Sound Judgement?.

We hope that you can learn from this lesson when you take out your next home loan.

~~This opinion was donated to the FORCHARITY account by Sidneygee.

To read more about this initiative, go to the FORCHARITY profile page and all will be explained!~~

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