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Wednesday, 15 May, 2002, 13:37 GMT 14:37 UK
Endowment mortgages: Expert took your questions
David Hollingworth of London & Country, a Bath-based mortgage broker, answered your questions in an interactive forum.

  Click here to watch the forum.  


A majority of people with endowment mortgages are being warned that they might have to find thousands of pounds extra to pay off their home loans.

Figures from the Association of British Insurers (ABI) show a sharp rise in the number of homeowners facing a shortfall.

Two years ago, 15% of people received the most severe warning that their endowment was unlikely to pay off their mortgage, in the form of a 'red' letter. That proportion has now risen to 34%.

Combined with an increase in 'amber' letters, about 60% of endowment holders, or 3.6 million people, are now in danger of failing to cover their mortgage debt, unless they take fresh action.

What action should you take? How can you seek redress?

The opinions expressed in this forum are those of our guests and not the programme. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.


Transcript


Newshost:

What is an endowment mortgage?


David Hollingworth:

Yes, I think it's important first of all to say that this is made up of two different elements - it's not an endowment mortgage one entity. There is a mortgage - the loan itself - upon which you are just paying interest alone to the lender. So every month you pay, to whoever the lender might be, purely interest on the loan - the capital balance remains exactly the same and it's not reducing at all. So for the whole life of your endowment mortgage the original amount you borrowed is still outstanding right the way through to the end. Unless you start making lump sum payments off the mortgage, you're going to owe 100,000 say at year 25, the same as you did at year 1.


Newshost:

So what happens is you have the loan which doesn't get paid off until right at the end of the mortgage - none of it is paid off until the end of the mortgage - and then you have an investment running alongside the endowment. Can you explain that side of things?


David Hollingworth:

The key word here is the investment. What you've got really is a repayment vehicle - in this case it's the endowments that are causing the concern but it could be any other kind of repayment vehicle. The endowment itself is an investment vehicle and what you've doing is making payments each month into the endowment, totally separate from the mortgage and what you're hoping is going to happen is that fund is going grow and eventually at year 25, you are actually going to have reached enough or perhaps even more to have paid the mortgage off.


Newshost:

So that money that goes into the endowment goes to the insurance company that arranges the endowment and then where does it go?


David Hollingworth:

Like I say, this is an investment and this is a Stock Market-based investment - there are going to be equities within that fund. So you are going to be subject to fluctuations that you see in the Stock Market.


Newshost:

Because what you get out of your endowment policy will depend on how well the Stock Market is doing, right?


David Hollingworth:

Absolutely. We've seen good growth perhaps through the 90s but what's happening now of course is the Stock Market is really struggling and that is one of the big reasons why we're actually starting to see these red, amber and sometimes green letters.


Newshost:

So Stock Market struggles, insurance company doesn't make as much on it's investments so it can't pass as much on to the endowment holder - that's the essence of the problem here isn't it?


David Hollingworth:

Exactly. The funds that you're building, rather than growing with increasing share prices or equity prices, what's happening is that actually you're seeing that fall back again and the fund is actually worth not as much as you were hoping originally.


Newshost:

So when we talk about a shortfall, we're talking about we expect the endowment to grow up to a certain target but if it's not growing quickly enough it falls short of that target, literally.


David Hollingworth:

Yes and we're looking at assumptions and this is one of the big key issues here. Going back to when a lot of endowments were sold, you were looking at projection rates higher than we're actually looking at now.


Newshost:

So what's the difference? Back when they were sold in the late 80s, everyone expecting them to be able to grow by 10 - 12% a year didn't they?


David Hollingworth:

Yes, sure - most were looking at 6, 8 or 10%. The regulator is now suggesting and insisting that endowment projection rates are now looked at 4, 6 and 8%.


Newshost:

So whereas before you could have expected 12% a year interest on your policy effectively, now it's only 6% or so?


David Hollingworth:

Again it's an assumption - there's no guarantees here - this is a projection rate, it is an assumed rate really and this is where the shortfall difficulties are coming in - it's fallen away and projections were wrong.


Newshost:

Let's briefly trace over what the regulator is doing - they've sent out letters to all endowment mortgage holders warning them of whether their endowment looks like it's going to work out or not haven't they?


David Hollingworth:

Yes. What they're doing is looking at the policy as it is and showing you on the new projection rates what you might be likely to receive at maturity. Now that compared with the target maturity level - which was the original level you were hoping for when it was sold to you, i.e. the mortgage amount - you need to compare those two figures to see whether you've got a shortfall.


Newshost:

So the typical one might be you hoped to get 100,000 to pay off your loan at the end of the time but now because of Stock Markets growing slower, the policies growing slower, it's only going to be 80,000 and so you've got a 20,000 shortfall.


David Hollingworth:

Exactly - that's the essence of the whole thing. Coupled with that we've got the Stock Market struggling, the insurers themselves they have also started to cut the bonus rates. Now if you're a with-profits policyholder that's also not good news for you.


Newshost:

Bonus rates effectively are what they pass on from what they make on the Stock Market.


David Hollingworth:

Indeed. Those are paid annually and then the terminal bonus at the end of the policy, which is very important, that can make up the bulk of the maturity value - those have also been cut recently.


Newshost:

But now we're in a situation where the majority are looking like they may well fall short. So let's have some of the questions. It's been causing a lot of anxiety and it's clear from our questions that a lot of people don't necessarily understand exactly how it works and are very worried about what they should do. Here's a question from L Teasdale, Southampton, UK: I have a 10 year old mortgage of 32,000 and I had an amber letter last year (that means some risk of a shortfall). A financial adviser told me not to worry until I get within eight years of the end of the mortgage term - I don't believe him - what can I do?


David Hollingworth:

He might be right, who knows? This is the crystal ball thing - how will it go from here - we can't see into the future and we just don't know. The problem is that if it doesn't improve you are actually going to be faced with shortfall and you are going to have to sort that out. Now the financial adviser, I guess, wont' be there to look after your shortfall so it's really very much down to what you're attitudes to that risk is as to what action you take or whether you wait and tough it out now and see whether things improve. It could be that markets improve and you might even get back to that maturity level.


Newshost:

But you'd have to be an optimist to believe that when you've been warned of a shortfall that you don't have to do anything about it and everything will work out well.


David Hollingworth:

It's the big danger here and this is a key aspect I think of what borrowers need to do is to take action sooner rather than later. The longer you wait, the more impact on your monthly finance it's going to have - it's going to hit you in the pocket harder.


Newshost:

This is a classic example because a lot of people when they were given endowment mortgages were told they could expect not only to comfortably pay off the mortgage but also to have a lump sum. Jeanette Heatherington, UK asks: Ten years ago I was sold an endowment mortgage through an independent adviser promising large profits. Two months ago we were advised to double our premiums but still with no guarantee to reach the target. I phoned several companies to sell this policy but no one is interested. Why is this? We have since changed to a repayment mortgage but is it worth keeping on as a savings plan?


David Hollingworth:

Obviously the advice is to be starting to be topping up the premiums - I guess she's going to take the view that could be good money after bad.


Newshost:

This is one of the questions about the actually solutions when you realise that there's a problem. Should you throw more money at your endowment policy in the hope that if it's got more money in it will grow to a large enough amount?


David Hollingworth:

Yes it's one option that you could look at. But it may not actually be open to you - you need to check with the endowment provider because there are what's known as qualifying rules and you can't just start throwing more money at it necessarily. It could affect those qualify rules and it might affect the tax status of the maturity value anyway.


Newshost:

And it might not be a good idea anyway?


David Hollingworth:

The second big question is whether you do throw more money at the endowment when perhaps it's not been serving you particularly well so far. Now in this questioner's case, what they've done is actually take away any risk at all of the endowment not hitting its maturity value by switching the mortgage to repayment. That is the only guaranteed way that you're going to be sure that loan is paid off at the end of the term.


Newshost:

But should they hang on? If they do switch they're going to end up paying more money aren't they? But should they hang on to their savings policy if they want to maximise the value they get?


David Hollingworth:

Again there could be benefit in that if markets improve - again the maturity value could start looking more healthy. They also have life assurance within that, so they've got life cover with the endowment. If they do decide to dump the endowment, they are going to have to remember to review their life cover arrangements. It's a difficult one - they may think - well I've had enough of this, let's get rid of it.


Newshost:

We'll come back to the question of surrendering endowment policies. Frances asks: I have two endowments. I've not received any information this year on how they're performing and I am very worried. What should I do?


David Hollingworth:

First of all these letters are still coming through. It may be a case that it's going to drop through your door any day. What you should be then looking at is what the various projection rates are and what kind of shortfall you might expect - probably at the middle rate of 6%, if indeed you have one. Now if you are really worried about it as in this case, just phone your provider up and ask them for the projection value right now. If the letter has not come, don't just think - ok that's fine - get peace of mind and get onto your provider.


Newshost:

And they are duty bound to give that to you aren't they?


David Hollingworth:

They need to be telling you whether it's performing as you'd hoped.


Newshost:

Mark Ashby asks: I have an endowment mortgage of two years old. Is this at risk? I was under the impression that more modern endowments are ok compared to the older style from the late 80s and 90s - is that true?


David Hollingworth:

Endowment risk - they go together - there is risk in a Stock Market investment as we covered at the beginning of this programme - you cannot escape that risk - it all depends on what the markets do. No way does it mean that just because you've recently bought the endowment there's going to be any less risk of it hitting target in 20 - 25 years.


Newshost:

This questioner did not give their name. They say: My parents have two endowment mortgages - one taken out in 1982 and maturing in April 2005 and a second taken out in 1990, maturing in August 2005. My father retired aged 65 and my mother has retired aged 60. My father will be approaching 72 and my mother will be age 68 when the endowments mature. They simply can't afford the repayments.

Do they have form of redress because that's a fairly clear cut case of mis-selling isn't it?


David Hollingworth:

There's a lot to suggest that selling an endowment to someone that's going to go on beyond their retirement age - I think it would be well worth looking to make a complaint there, unless that was clearly covered with them at the time of the selling. Now in order to try and get redress, you're first point of call is with the person who sold you the policy - that's the important thing. Now go to that person - there is the possibility that they're no longer around - maybe a small broker who may have disappeared. You could actually then look to go to the Financial Services compensation scheme in that instance. If they are there, make a formal written complaint - they must come back to you with their findings. Now they may say - no there's no mis-selling here or they may come back with an offer.


Newshost:

Then you can go to the ombudsman if they don't make an offer. What actually determines whether they are at fault from mis-selling or not - this is an interesting question because it may be that for a lot of people their endowments aren't working out but they haven't been mis-sold. So they may be facing a shortfall but they haven't been mis-sold.


David Hollingworth:

Indeed but on a different issue to this - this one is going beyond retirement age. The fact that you have a projected shortfall does not necessarily mean that you were mis-sold the policy. By virtue of the shortfall, but not necessarily mis-selling at all - it's just not performing as well as hoped. Where mis-selling can come in if you were not made aware of the fact that this is actually a Stock Market investment - can go up, can go down - there's no guarantees that it's going to hit the mortgage amount at all and also did they actually talk to you about that risk - did they assess what kind of attitude you had to risk.


Newshost:

Because if they didn't ask you when you were taking on the mortgage whether you were cautious or not about your home and about the way of repaying your mortgage - they didn't assess your attitude to risk, then they may well have mis-sold it, mightn't they? Because endowments are inherently more risky than repayments.


David Hollingworth:

They are indeed. Repayment, no risk - with an endowment there is risk. If they weren't discussing that with you and making you aware of the risk and actually assessing whether you had any thirst for risk with your mortgage then you definitely you could start looking at a mis-selling claim. If it's just a case of - hang on I did know that but actually the endowments not doing as well as I was hoping.


Newshost:

But if you never wanted to take a risk with your house - if no one asked you about that and if you would have been horrified by the idea that whether you paid off your mortgage or not was down to the Stock Market - then in that case you probably have been mis-sold.


David Hollingworth:

What you need to look at also is the paperwork - there's a chance that that was covered in the paperwork and that's going to go in the provider's favour.


Newshost:

But even then the small print isn't necessarily a get out is it if they haven't bothered to talk to you about risk?


David Hollingworth:

You have a right to complain and you have a right to say - look I believe I was mis-sold.


Newshost:

The ideal situation to get a mis-selling claim through I understand is if you actually have something written down at the time of the sale which indicated that you were guaranteed that the product was safe and that you had no risk of a shortfall.


David Hollingworth:

Anyone telling you that an endowment is guaranteed to cover the mortgage - they've mis-sold you.


Newshost:

Mat Temple: I took an endowment three years ago. Should I be worried about its growth - I have not received an adverse letter so should I worry?


David Hollingworth:

Again it's worth getting back to your provider - don't just take the fact that you've not head anything as a good performance of your endowment. What you need to do is get onto your endowment provider and ask how it is doing.


Newshost:

Yvonne Airey: My endowment matures in 16 years. I have received an amber letter (serious risk). Should I change my mortgage converting to half repayment and half endowment?


David Hollingworth:

This is a very interesting solution and one again that people perhaps aren't totally aware of. Rather than just going for this whole one camp or the other and switching the whole mortgage into repayment which can seem quite daunting in terms of the size of the monthly cost. What you can actually do is put part on repayment and part on interest only. So what you're saying is - let's put the shortfall and maybe a bit more as a buffer onto repayment. You're chipping away at that shortfall all the way through the remaining term and hopefully the endowment will do well enough to cover that reduced amount - obviously you need to keep reviewing that.

One thing I would say, we're in such a low interest rate environment at the moment, it makes ideal sense to be reviewing the mortgage rate you're paying - that can assist you massively in dealing with this problem. If you were to get hold of a better rate - look for the best deals in the market - you could actually put the shortfall onto repayment - you could still be making monthly savings and you know that you're actually chipping away at that shortfall.


Newshost:

And if you save something like the amount that's been cut off your monthly payments in interest rates over the last couple of years - then if you've got about 10 or 15 years to go, I understand you should be more or less alright. So say your monthly payments have come down by about 100 on a 500 monthly payment - if you put that into a saving plan of some sort then hopefully that should work out more or less right.


David Hollingworth:

There is another solution which is often mentioned with shortfalls. You start taking money and putting it into an alternative investment - now some would say, even another endowment but I think most borrowers are shying well clear of that. But it could be into an ISA and I think that's an interesting point as well to remember that an ISA is an equity based investment.


Newshost:

So it's not necessarily that much better if the markets aren't going to do well - they aren't going to do well.


David Hollingworth:

You have risk again - it's all back to this word - risk. Yes, there's a chance it won't reach the value that you were hoping or you could have a shortfall on your shortfall repayment vehicle.


Newshost:

Simon Apperley: My question is whether there is a market for selling and buying endowment policies? Would I be foolish to sell my 7 year-old policy (I had an amber letter last year) and let some else benefit from me having paid most of the up front charges?

He's got a point here because endowments have big up front charges so you'd do badly if you surrendered them early or sell them early?


David Hollingworth:

Yes, if you're looking to surrender them early you may not even be getting back what you paid in because all the charge are front-end loaded as you say.


Newshost:

So you get all the value out at the other end of the contract.


David Hollingworth:

Indeed. With profits policies you're really looking for the terminal bonus. Now if you sell or surrender the policy that's the end of the terminal bonus - you're not going to get that. This is why you've got the second-hand endowment market. People are willing to buy these endowments, perhaps halfway through their term just an investment to get a return when they actually come to maturity. But if you've decided with the endowment - I want to get rid of this. What you should do is check out a second-hand market because you may well get a better price for it than you would than you would just by surrendering it to the provider.


Newshost:

But in a way strictly if you've paid the up front charges on an endowment and say you're about 10 years into the contract - it's usually a bad idea to get rid of it either by selling or surrendering isn't it because you've taken most of the pain and you've got all the value to come.


David Hollingworth:

Sure and this is where the part repayment and part interest only really does come into its own. You're retaining the ability to get the terminal bonus, you're actually dealing with the shortfall problem right now - hopefully at very little extra cost and you've also got that life cover, let's not forget that - you've got life cover there which is guaranteed to cover the mortgage no matter how badly the performance of the endowment is doing, you have got life cover which will pay your mortgage off.


Newshost:

Steven Muster: I took out my mortgage in September 1988. Is it true that as interest rates were quite high until the mid 90s, my endowment should be less affected by the current low rates than say one taken out in 1997? Is it true that that endowment will be better value as a result of that?


David Hollingworth:

He needs to look at the specifics of his policy. Performance between providers does vary quite dramatically so it could depend on which provider he is with. Now one reason why a lot of people were going for endowments was because of the high interest rate environment. The capital erosion you were getting on a repayment was very slowly chipping away at the mortgage. Now we're in a very different environment and for people taking a mortgage now, repayment does look a sensible option because you're really chopping into that quite heavily - you're not making such massive elements of interest payments as you were when rates were around 15%.


Newshost:

Robert Weir: Will this whole business also affect PEP mortgages? (PEPs the old version of ISAs which are a personal equity plans). I have a PEP mortgage which is underperforming.


David Hollingworth:

Again it is an equity based investment so yes it could down as well as up. So very definitely he should be looking at it. The good here is that he is actually reviewing it. Because whereas endowments are having these letters - the red, amber and green letters coming through, with ISAs and PEPs you're not going to get warnings or projections as to how it's doing - that's really down to you. You're going to have to review that more closely because they're not going to be coming through automatically. So it's good that he is looking at that and yes there is a risk that he could get a shortfall.


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