Endowment snakes and ladders
By: Michael Challiner
Since 1970, the average house price in the UK has increased over 35 times. The cost of the average house in 1982 was just over £26,000 - twenty five years later this has risen to almost £185,000.
Nowadays, mortgages come in all shapes and sizes and are “off the shelf” but until the early 1980’s the usual mortgage tool was the repayment method. Achieving a mortgage was a serious business and prospective borrowers used to save with “their” building society in the hope of being considered for a mortgage when they’d saved the necessary deposit.
By 1982, there was a new and very popular mortgage available. Unbelievably, this was one where you didn’t actually repay a penny of the loan until the very last day of the mortgage “term” - usually 25 years hence. Many building societies offered this option and took a good deal of care to explain the process to prospective buyers, fully explaining the risks involved. These buyers went into any subsequent agreement with their eyes wide open.
Instead of borrowing the capital amount and starting to pay back the loan, with interest added, from the beginning of the agreement, as had been the normal method of house-buying, with this loan your mortgage payment was purely interest. The actual sum borrowed remained constant. The final payment, at the end of the 25 year term, was met from the proceeds of an endowment policy, taken out at the start. This policy was based on the price of shares and the mortgage and the endowment policy ran alongside each other. The deal sounded almost too good to be true and promises of sufficient funds to pay off the mortgage early, or celebrate the clearing of the mortgage with amazing bonuses tempted millions of borrowers to abandon the old-fashioned repayment mortgage and get up to date with their house-buying.
However, many unscrupulous salesmen jumped on the bandwagon and many earned very lucrative commissions on sales of the endowment policies which were part and parcel of the deal. Not all of these salesmen had experience in either the mortgage or stock market and they were possibly not aware themselves of the risks their customers were exposing themselves to. There was an apparent lack of attention to their buyer’s financial status in their haste to secure the deal, resulting in endowment miss-selling.
For almost ten years now, endowment payments have been falling, resulting in warnings that policies are not expected to cover the mortgages. Companies who invest their funds in shares and properties have fared better than those who have relied on fixed interest and cash. Having said that, one of the main companies, Norwich Union, are admitting that around half of the 48,000 policies due to mature in the near future are likely to see a shortfall and this is expected to average £1,400. Norwich Union, together with Prudential and Legal and General, favour the funds and properties portfolio and therefore their results are likely to be more favourable than many companies.
Even in the last year, with the share market generally performing favourably, payouts have dropped and a policy worth over £45,000 twelve months ago now has a value of just over £42,000.
It’s possible to get out of these endowment policies, but generally companies charge an exit fee. If you’re considering arranging an alterative way of paying off the balance and cancelling your policy, you need to find out what costs would be involved.
If you need help with re-arranging the balance, contacting an on-line broker would be the best plan of action. They’ll advise you on the best plan of action and give you all the help you need.