Endowments - are they that bad?

qualityp

Hi,

Before we start, I should say that I really dont know that much about mortgages, this is all from memory and I can provide actual figures this evening when I get home from work.

I have an 85k endowment pollicy with a 2% discount with Alliance & Leicester for 18months (might be 2years, cant remember), I am about 6-7 years into the 26year pollicy on a property worth around 160k (possibly more)

This is my 1st property and initially it was a joint mortgage with my father as I wasnt earning enough at the time to get a pollicy on my own. After a couple of years I swapped to a new discount mortgage without my father, then last year I swapped to the A&L pollicy for the discount rate.

I have had no letters saying that my endowment wont cover the 85k and everything seems on track (as far as I know)

My basic question is this; everytime I mention to anybody that I have an endowment they reel back in horror saying how bad endowments are. How im not actually reducing the debt etc etc etc

Would I be better switching to a repayment??

Any advice would be greatfully received.

Cheers

QP

dunstonh

Unless you know about your endowment you cant tell if its a good thing or a bad thing. Some are good, some are bad, some are awful. The product is obsolete by modern standards and doenst stand up to alternatives available today. However, the front loading of charges at the start is sometimes coupled with lower ongoing charges or increased allocation rates later in the term which looking forward from this point can make the endowment cheap.

Without knowing anything about your endowment and where its invested, we cannot offer any opinion at this stage.

qualityp

dunstonh wrote:

Unless you know about your endowment you cant tell if its a good thing or a bad thing. Some are good, some are bad, some are awful. The product is obsolete by modern standards and doenst stand up to alternatives available today. However, the front loading of charges at the start is sometimes coupled with lower ongoing charges or increased allocation rates later in the term which looking forward from this point can make the endowment cheap.

Without knowing anything about your endowment and where its invested, we cannot offer any opinion at this stage.

Thanks for your reply, I will dig out the paperwork tonight.

What info will you need? Presumably who its invested with, how many units I have but is there anything else.

Sorry for the dumb questions but as I said im fairly clueless when it comes to mortgages.

Cheers

QP

maninthestreet

The endowment company should be sending you annual statements setting out the possible investment returns for the endowment in the future, assuming returns of 4,6 and 8%, the current cash-in value, and whether your endowment is still on track to pay off the mortgage for which it is the capital repayment vehicle. If the endowment is on track, there is currently no need to take any further action. Cashing in the endowment will probably result in a payout less than the premiums you paid in, and you will lose the
life assurance that comes with the endowment.

EdInvestor

maninthestreet wrote:

Cashing in the endowment will probably result in a payout less than the premiums you paid in

This is not necessarily the point. More important is to judge whether sticking with the endowment will produce better returns over the period to maturity than cashing it in and using the money to repay the mortgage.

Very often it is better to junk the endowment.

As well as the surrender value, maturity forecasts, we also need your monthly premium, maturity date and guaranteed value (sum assured and bonuses), if appropriate to take a view.

qualityp

Sorry for the delay guys. I couldnt find a recent statement so I phoned them up, here are the details...

Norwich Union Balanced Managed Fund

As of 5/12/06 it is currently worth £7,639.97
2568.573 units @ £2.9744
To mature in 2030 (I thought the mortgage was only 26 years but I guess not)

monthly payment £115.36

Is there anything else I need to find out??

Cheers

QP;)

EdInvestor

If this endowment grows at 6% (net of charges and the cost of life cover) at maturity it will be worth 103,318.

If it grow at 5% - or, if you cashed it in and put the lump sum and the monthly premiums towards a mortgage with an interest rate of 5% - then it would return 87,703 at maturity.

So either way looks like you're on track for the moment.

As they've indicated by not sending you any warning letters.

dunstonh

As balanced managed funds go, NUs hasnt been too bad and 14-17 year performance would put you in a surplus position (it was launced 17 years ago).

Recent peformance has obviously been much better with the recovery. It hasnt failed to make double digit returns for the last 4 years. All those cheap units bought through the stockmarket crash period would have made a lot of money now.

qualityp

EdInvestor wrote:

If this endowment grows at 6% (net of charges and the cost of life cover) at maturity it will be worth 103,318.

If it grow at 5% - or, if you cashed it in and put the lump sum and the monthly premiums towards a mortgage with an interest rate of 5% - then it would return 87,703 at maturity.

So either way looks like you're on track for the moment.

As they've indicated by not sending you any warning letters.

Thanks a lot for your reply Ed. So my options are...

• Keep paying the endowment and the interest
• Cash in the endowment, get the 7.6k, use this as a deposit and change to a repayment mortgage.

Presumably there would be penaltys for cashing in the endowment early and solicitors fees but this aside, what would be the benefit in changing to a repayment mortgage?

As I understood it with an endowment my monthly payments are lower but you end up paying more in the long run, is that correct?

Cheers

QP

EdInvestor

qualityp wrote:

Thanks a lot for your reply Ed. So my options are...

• Keep paying the endowment and the interest
• Cash in the endowment, get the 7.6k, use this as a deposit and change to a repayment mortgage.

Or use the lump sum and premiums to overpay the existing interest only mortgage.

Presumably there would be penaltys for cashing in the endowment early and solicitors fees

Nope.

what would be the benefit in changing to a repayment mortgage?

Primarily,there is no risk. Also it could be cheaper ( as with overpaying an I/O mortgage.) What interest rate are you paying on your current I/O mortgage?

dunstonh

As I understood it with an endowment my monthly payments are lower but you end up paying more in the long run, is that correct?

No.

Endowments were generally cheaper on monthly payments than repayment mortgages. If the endowment hits target at the end, then you have saved money over the term. If the endowment falls short, you could still have saved money (i.e. £10pm difference over 25 years is £3000 so any shortfall less than that £3000 is money saved). If the endowment falls short by a large figure, it would have cost you money.

You are investing money with the hope of beating interest rates. NU's balanced managed fund has managed to do that most of the time. There are always going to be years it doesnt but that isnt a bad thing as you want those years to begin with so you can buy those units cheap.

For example, its up 14.83% in the 12 months to 31st October. Thats double your mortgage interest. It wont do that every year with that fund but a long term average of 8% is within the potential and in line with its long term performance since launch.