Switch Endowment to Repayment and make overpayments?

MobileSaver

Hi,

I've a £160k mortgage on a £350k house with 10 years left to go and have around £20k in savings. Currently the mortgage is linked to a slightly underperforming endowment.

I'm paying £778 a month 'interest only' to the Skipton and am well outside of any early redemption charge period.

I could comfortably afford to be paying £1800 a month towards the mortgage but can't work out whether:

1) I'd be better converting the 'interest only' to repayment (thus leaving me with a nice endowment cash payout in 10yrs time)
2) Switching to a flexible mortgage and overpaying by £1000+ a month
3) Switching to a better rate 'interest only' (£150k as I'd pay off £10k at the same time) mortgage on the basis that the endowment when it matures will pay off the capital.
4) Switching to a repayment and cashing in the endowments to pay off more of the current mortgage.

Any suggestions from any of the more knowledgeable people on here? Are there any better options for me?

Thanks in advance.

jamesd

What is the interest on the current mortgage? It seems to be around 5.8%? If so you could probably do considerably better by remortgaging, since I expect you to get a rate in the 4.8% range and save perhaps 1600 in interest in the first year.

You should compare the interest rates for a flexible mortgage with those for a non-flexible mortgage with a shorter term and decide whether you want to commit to the higher monthly payments instead of having them as optional overpayments. The interest rate will probably be a little lower but you will lose significant flexibility.

You should also compare your possible savings or investment return for the 1800 a month to the benefit from reduced interest on the mortgage. Over the remaining mortgage term you should be able to comfortably exceed the mortgage interest rate return if you invest it with moderate to high risk. Ignoring the stock market, something like zopa.com could give you a better return for regular cash input, particularly in a few weeks when their new markets for higher risk/return borrowers launch.

If you are paying tax, using your full 7000 a year ISA allowance before overpaying on the mortgage is probably a good choice.

Hard to comment on the endowment without knowing its current and likely value. In any case, beyond that I don't know enough about them to make a suggestion on what to do with it, so I'll leave that to others...

EdInvestor

You should really regard the endowment as a separate investment,Post some info about it so we can see if it's worth keeping or would be best cashed in or sold and used to reduce the size of the loan or offset against it.

Company it's with
Guaranteed sum assured
Declared bonuses
Surrender value
Monthly premium
Maturity date
Maturity projections

MobileSaver

Thanks for all the useful suggestions.

jamesd wrote:

What is the interest on the current mortgage? It seems to be around 5.8%?

Yes, currently paying 5.89%.

jamesd wrote:

You should also compare your possible savings or investment return for the 1800 a month to the benefit from reduced interest on the mortgage.

Right, this is the bit I couldn't get my head around but now that you've stated it in black and white, it's now pretty obvious how I should approach the dilemma - thanks! :cool:

jamesd wrote:

Over the remaining mortgage term you should be able to comfortably exceed the mortgage interest rate return if you invest it with moderate to high risk. Ignoring the stock market, something like zopa.com could give you a better return for regular cash input, particularly in a few weeks when their new markets for higher risk/return borrowers launch.

I hadn't heard of Zopa before today but sounds intriguing so I'll take a closer look.

jamesd wrote:

If you are paying tax, using your full 7000 a year ISA allowance before overpaying on the mortgage is probably a good choice.

Yes, I'm a high rate tax payer. Is there a simple explanation (for a simpleton like me) as to why an ISA is a good choice. I'd decided not to bother with ISAs as it's tying up money with what appeared to be a low interest rate of 4% or 5%.

Thanks again for all this food for thought.

MobileSaver

EdInvestor wrote:

You should really regard the endowment as a separate investment,Post some info about it so we can see if it's worth keeping or would be best cashed in or sold and used to reduce the size of the loan or offset against it.

Company it's with
Guaranteed sum assured
Declared bonuses
Surrender value
Monthly premium
Maturity date
Maturity projections

I've actually got two endowments as I remortgaged 5 years ago.

Norwich Union nominally £100,000
Min life insurance £49,500 (is this the Guaranteed sum assured?)
Bonuses £6455.70
Where do I get the surrender value from?
Premium £274.65
Matures May 2016
Maturity £93,600 (at 6%)

Standard Life nominally £60,000
Amount paid on death £60,0000 (is this the Guaranteed sum assured?)
Bonuses not listed except "2% a year last year, 1.5% this year"
Where do I get the surrender value from?
Premium £248
Matures March 2016
Maturity £58,000 (at 6%)

The only saving grace with the Standard Life policy is that I bought some discounted demutualisation shares and am currently sitting on a £3500 paper profit on these.

Can anyone make any sense of the above data?

jamesd

The ISA is tax and capital gains tax free. For simplicity I'll consider the cash ISA, but if comfortable with investing you shouldn't use it because all 7000 in maxi stocks and shares can be expected to give a better long term return, assuming you have 5+ years as your time horizon, which you do if the idea is to invest to pay off this mortgage as efficiently as possible.

No tax on a 5% ISA means it's equivalent to 5%/0.6 = 8.3% gross. That's hard to beat with normal savings accounts and just one regular saver beats it, the 10% available for one year only from Alliance and Leicester, limited to 250 a month.

Today, paying off your mortgage at 5.8% looks good. That's also tax free (you're paying it in interest, not getting interest, so there's no deduction). That makes it equivalent to 5.8%/0.6 = 9.7%. Not going to beat that easily from savings accounts.:) But of course that's a high mortgage rate and once you change to a better rate the benefit of overpaying falls. Say you switched to 5% it would be equivalent to the same 8.3% as the ISA.

Your challenge is to beat those rates. You probably can at zopa (after allowing for bad debt, they say how, and by picking suitable markets and interest rates to offer) and the stock market longer term can be expected to return something like 11%, more for higher risk investments.

Your choice is actually easier than for a basic rate tax payer in some ways: your tax bracket makes paying off the mortgage a much better choice than it is for a basic rate tax payer. But you should still be able to do better by investing. Catch of course is that investing isn't guaranteed - paying off the mortgage is. If you want a simple and safe life with a guaranteed return of about 8% gross (after remortgaging), paying off the mortgage is the way to go.

jamesd

You ask the company for the current surrender value.

MobileSaver

jamesd wrote:

You ask the company for the current surrender value.

Ok, thanks, here's the updated details with surrender values.

Norwich Union nominally £100,000
Min life insurance £49,500 (is this the Guaranteed sum assured?)
Bonuses £6455.70
Surrender £28264
Premium £274.65
Matures May 2016
Maturity £93,600 (at 6%)

Standard Life nominally £60,000
Amount paid on death £60,0000 (is this the Guaranteed sum assured?)
Bonuses not listed except "2% a year last year, 1.5% this year"
Surrender £17413
Premium £248
Matures March 2016
Maturity £58,000 (at 6%)

The Norwich Union one also has a a "Shortfall Promise" whereby they'll pay up to a maximum of £10,200 extra at maturity to cover a shortfall up to this amount - based on 6% this should comfortably cover my shortfall.

Also intriguingly the Norwich Union advisor stated that they are currently planning to reorganise their with profits bonuses/policies with a view to offer additional incentives... and that making any changes to the policy now may affect my entitlement to these incentives.

Does anyone have any idea what she was referring to?

EdInvestor

Taking the SL one first, if you surrendered it and used the money to reduce the amount owed on your mortgage @5.89% also paying in the premiums to maturity, your (guaranteed) return would be 71,120.This compares with SL's (risk-based) projected return @6% of 58,000. I doubt the SL fund will make a 6% return, probably more like 4%, so IMHO you should dump this one.If you need the life cover replace it before surrendering or selling the policy.

You could try this site for a quote, some SL policies reportedly command a 5-10% premium over the surrender value:

https://www.apmm.org

The NU fund has performed significantly better.Which one are you in, the old NU one, or the CGNU, or the old GA/CU ones? This may be relevant to what the advisor said : NU has announced it will be distributing a windfall to some members soon..

If you surrendered this one and used it to reduce the mortgage as above, your return would be 94,375 , only slightly above their maturity projection of 93,600.

However paying off the mortgage is a guaranteed return, whereas with the endowment you are exposed to risk.

So in the absence of any reward I would let this one go as well, escept for one thing: the windfall.If you were eligible for that, it might provide a suitable reward for the risk. And in any case, it would make sense to wait until the money comes in, not surrender it now. Assuming you are eligible.It's for the people in the old GA and CU funds, IIRC.

MobileSaver

jamesd wrote:

Your choice is actually easier than for a basic rate tax payer in some ways: your tax bracket makes paying off the mortgage a much better choice than it is for a basic rate tax payer. But you should still be able to do better by investing. Catch of course is that investing isn't guaranteed - paying off the mortgage is. If you want a simple and safe life with a guaranteed return of about 8% gross (after remortgaging), paying off the mortgage is the way to go.

Thanks for all this great advice.

I can see I'm going to have plenty of food for thought this weekend as I arm myself with a calculator, Excel and a huge pot of coffee.

MobileSaver

EdInvestor wrote:

so IMHO you should dump this one.If you need the life cover replace it before surrendering or selling the policy.

https://www.apmm.org

Thanks for all the great advice.

I recently took out separate life insurance that as it happens would cover both endowments so no worries there.

I've been to the apmm site but am stuck with two of the questions.

"With-Profits Basic Sum Assured" My SL statements don't list this anywhere - does that mean the value is zero?

"Total Reversionary/Current Bonuses Attached to Policy" SL list this as 2% a year rather than a value, would the value be the same as the difference between the surrender value and the funds value?

EdInvestor wrote:

The NU fund has performed significantly better.Which one are you in, the old NU one, or the CGNU, or the old GA/CU ones? This may be relevant to what the advisor said : NU has announced it will be distributing a windfall to some members soon..

The policy started in 1998 so I'm assuming it's the old CGU one as from what I can gather CGNU didn't happen until 2000 and I have a letter from early 2000 on CGU headed paper.

I think I'll definitely hold on with this one for any windfall plus there's also the "Shortfall Promise" of £10,200 to consider.

Thanks again for taking the time to shed some light on this subject.