Help me, mortgage strategy confusion...

wildey_saver

Hi Everyone,

I have been reading these Forums for months now, but mostly the money saving ones without realising that these mortgage ones existed. I'm in a state of confusion and would appreciate any advice.

I'm 30 and have got 10 years 6 months left on a £90k interest only mortgage against a £250k house. I do not want to have any debt after that time. I have got 2 different Endowments, 1 that I had and 1 "The Wife" had, they come out within 3 or 4 months of each other.

My wifes is with Legal and General and is a with-profits one. She was told it would pay of her (at the time) £40k mortgage and leave her with (quote) "enough for a sports car and then some..." She was given non options for repayment and never told it might not hit the £40k. It is currently heading (@6%) towards about £28k (I believe this excludes the final bonus). The payments are £590 p.a.

I on the other hand have a Standard Life policy called a "Versatile Investment Plan" which my dad started for me at 15. The man from the Halifax told him that this was ideal as would pay off my mortgage at 40 etc etc. However despite paying in 15 years worth at £500 p.a. its only worth £9500, and I believe the surrender value is normally about £1.5k less. This may make about £22k @ 6%.

I need to start making some quick decisions to get things back on track and therefore have got a list of questions. If anyone feels that they can help please do.

1) Could I claim for misselling on either or both these policies ?
2) Should I stop / cancel or sell either or both ?
3) Is it worth carrying on paying into them for the next 10 years - I can afford to do so at the moment ?

4) Given that they will pay out £50k I will be left a shortfall of £40k. What is the best way to save that up in 10 years ?
5) If I moved to a repayment mortgage (I could just about afford to go repayment on £92k and keep endownments running, how much capital would I pay off in this time ?
6) Would I be better just keeping interest only and starting another investment for next 10 years to try and get together £40k ? I could afford £150 a month.
7) How can I calculate compund interest over next 10 years, for example if I stuck £150 away each month into ISA's that paid 5% Tax Free then what would it be worth ?

As you can tell I am at a loss of what to do.......

HELP !

westernpromise

wildey_saver wrote:

1) Could I claim for misselling on either or both these policies?

It depends (a) when you took them out and (b) how long ago they first notified you that there might be a problem. Google for "endowment misselling" and you'll get loads of sites which will tell you whether you have a basis for complaint.

2) Should I stop / cancel or sell either or both?

I'd be leery of taking investment advice on a forum such as this. You have 3 options, however.

1- carry on paying in, and make other arrangements to repay the uncovered portion of your mortgage, eg. switch it to a repayment basis.

2 - make the policy 'paid up', i.e. don't make any more payments, so its value grows only on the basis of what's in there already, but don't surrender it.

3 - Sell or surrender the policy, whichever's better, then either reinvest the lump sum or pay off part of the mortgage with it (thus effectively assuring yourself of a return equivalent to the mortgage rate).

In cases 2 and 3 above, you can then spend the endowment premia on some other savings vehicle that will hopefully pay off the deficit. You should replace the life assurance element of the endowment policies though. Term insurance for a 30-year-old is going to be pretty cheap.

3) Is it worth carrying on paying into them for the next 10 years - I can afford to do so at the moment ?

Depends on your attitude to risk, among other things. There is, however, no reason to expect a higher return from your endowments companies than from any other, even less so if their endowment fund is going to be depleted by other people's compensation claims.

4) Given that they will pay out £50k I will be left a shortfall of £40k. What is the best way to save that up in 10 years ?

The safest way is to convert your mortgage to a repayment basis. This may not be the 'best' - the best would be to find an investment that grows at a rate in excess of what your mortgage lender charges you. That, of course, is why people bought endowments in the first place.

5) If I moved to a repayment mortgage (I could just about afford to go repayment on £92k and keep endownments running, how much capital would I pay off in this time ?

Depends on the interest rate. According to Egg's mortgage calculator (http://new.egg.com/visitor/0,2388,3_54988--View_1028,00.html), a £92k mortgage over 10 years would cost £975.35 a month at 4.99% and would entail total payments of £117,042.37. So you would pay back £92k capital and £25k interest.

If you do this, you don't really need to keep your endowments running unless (a) you think the return on those premiums is better than you could obtain elsewhere, and (b) you don't need access to the money until the policies mature.

6) Would I be better just keeping interest only and starting another investment for next 10 years to try and get together £40k ? I could afford £150 a month.

See above. It all depends on the performance of the other investment.

7) How can I calculate compund interest over next 10 years, for example if I stuck £150 away each month into ISA's that paid 5% Tax Free then what would it be worth ?

Each year you'll earn interest on the average balance. So 5% tax free on £150 a month = (12 x £150) + (5% of 6 x £150) = £1,845. Over 10 years, £23,772.

Try this for a rough idea http://www.moneychimp.com/calculator/compound_interest_calculator.htm

but bear in mind that if you chuck the money at the mortgage, you are effectively being paid the mortgage rate on your savings, instead of the deposit rate. The former is usually higher than the latter, because that is how banks make money. The simplest route is thus to increase your mortgage payments, unless you value having access to an emergency pot of cash.


hth...