Advice please on cashing in 'flexidowment'

ecarter

Can anyone give me advice please? My husband has a Prudential 'flexidowment' which he has been paying £20 per month into for 23 years. It's flexible because it has guaranteed payouts along the way if you choose to cash it in. It matures in another 20 years time. If he were to cash it in today it would pay out about £13k so it presumably performed pretty well in the first ten years when endowment times were better.

In the meantime, we have a huge mortgage which we are paying back at 7% which we cannot reduce by switching mortgage because of our poor loan to value ratio. (We will revert to variable rate in September 2012). We couldn't switch the mortgage even if we paid £13k off it. However, paying that amount off would reduce our mortgage payments by about £100 per moth.

My feeling is we should cash it in and reduce our payments but clearly the risk is that endowments suddenly start performing again during the next 20 years in which case we would have lost out.

Any thoughts anyone? Many thanks

dimbo61

So your husband was sold a low cost £20 a month flexiendowment some 23 years ago and it still has 20 years to run ? Will that take him up to 65 and why did he take it out?
He has paid £5520 in and its now worth £13,000 after 23 years! thats a poor rate of return and you are paying 7% on your mortgage as well.

DVardysShadow

ecarter wrote: »

Any thoughts anyone?

If you do cash it in, you will have £120/month, of course.

Put to the mortgage, as and when you can overpay without penalty, this is £1400/year paid off, which will return 7% in reduced payments.

ecarter

Thanks, both. I think it is supposed to mature when he is 65. He was originally bought the policy as a present. We can overpay at any time without penalty on the mortgage so presumably we'd be better off paying a lump sum rather than a bit per month.

DVardysShadow

ecarter wrote: »

Thanks, both. I think it is supposed to mature when he is 65. He was originally bought the policy as a present. We can overpay at any time without penalty on the mortgage so presumably we'd be better off paying a lump sum rather than a bit per month.

Eh? £1 paid off is £1 paid off whether it is on its own or with another £999. So what do you mean?

You need to realise that if you cash in the endowment, you have nothing in place to pay the mortgage off unless you are on repayment terms. So you need to overpay the £120 you have freed up towards the mortgage. This effectively returns you 7%.

And the benefit of overpaying is that sooner or later you will qualify for a deal at a lower percentage. Suppose your mortgage is £105,000 and you can get a rate of 5% if you drop to £100,000. Once you get that new rate by overpaying £5,000, you will save 2% on £100,000 - which is equivalent to an additional rate of 40% on your £5,000. A total benefit of 47% on your £5000. Apply your own figures to this, it might not be so dramatic - but if you can overpay to get down to a lower mortgage, the money will reap a lot of benefit.

Does not matter whether you do it £1 or £1000 at a time.

ecarter

Thanks. The endowment is not linked to the mortgage (we have another one that is but we're on part and part repayment and endowment). Our advice is that at the moment the loan has to be 85% of the house value to be able to even get a different mortgage at all. But you're right - eventually we will get down to that ratio if we pay off a lump sum and then keep overpaying.

DVardysShadow

So how much do you need to save to get to 85%? [This is a moving target of course!]

ecarter

Probably another 10-15k on top of the 13k we'll have from cashing in (depending on how much we could get our house valued for - I've been told valuers are being instructed to value low)

dimbo61

So pay the £13K off the mortgage and overpay by £120 a month and hope the housing market improves but in the mean time you are saving/overpay at 7% TAX FREE!