Cashing in Endowment / Re-mortgage - Advice please ?

ColinD

Hi Guys,

My first post.... expect a few more soon......

Ok... I'm just about to re-mortgage and have secured a fixed 3.75% deal for 2 years (or just over) with no fees (well £30 or something silly) - Thats a fairly good deal in my books. RBS. Halifax wanted MORE than that... I'm currently on base rate at 3.5% but they wanted BLOOD from me to borrow more and took the proverbial.

RBS... Well....I can over pay this beast my up to 10% of the outstanding balance per year, and am going to try my best to overpay as much as I can in the short term.....

The offer is there.... I'm still gainfully employed at the moment, and will find another job easily enough in the future....

If I pay off more than 10% per year, or pay the deal off early (before Aug 2013) - I get charged 3% of the outstanding balance. Simples..... - I can live with that.....

Now...I was going to borrow £69K from RBS and keep my investments going ( I have 10K+ in shares too).... My existing mortgage is 38K

BUT....I've just been told I may lose my job in the next Year or Two as our site is closing down and moving abroad. I should have a reasonable pay off though, but we have no idea of the figures, and they won't tell us till we get the 6 months notice letter - That could be a year away yet or so....

Times are VERY uncertain and I'm unable to financially plan accurately for the time being..... Its not worth looking for another job, as the payoff is worth hanging on for, and I then have 6 months to find another job when I get my figures.

So.... my sights have now dropped from long term investments to shorter term things so I can hopefully get my house paid for in 18 months to 2 years - Its been quite scary.

I need the money to build an extension (well an outbuilding) and it cannot wait any longer..... Its as simple as that... I've been hanging on for ages..... If I don't get this done now, I never will, and I really need to do this... simple as that.... I'm not going into further discussions with this... its a DONE DEAL.

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Time to cut to the chase......

I now plan to borrow only 50K (and not 69K) - Early repayment penalties are 3% of outstanding balance as stated above..... Using Martins overpayment calculator, I reckon I can get the 50K down to about 45K after the first year, and then hopefully shave another 5 or 6K off it, to get back roughly where I am now 40K ( 38K'ish) when I get paid off.... and hopefully have enough to clear it 100%....

So... I'm 19K Short of what I was offered.... what do I do. ?... Well....

I have an endowment (25 year) and am about half way though.... I don't feel it was particularly mis-sold as the risks were explained etc.... Don't feel its worth perusing as a claim.... Its NOT going to reach 38K on maturity and I have had the shortfall letters for 3 or 4 years now.... did not worry me as I have some other investments long term......

Currently this ED is worth about 11.5K if I surrender it..... A lot more than I thought - Its £72 per month.

For Maturity.... another 12 years or so.... I have 3 lots of figures..... I'm not going to let this mature as is far too risky... and is why I ask for advice please.....

4% Growth = 25.5 K
6% Growth = 31.2 K
8% Growth = 38 K (pipe dream perhaps, lol ?)

So.... As I'm only about 1/2 way though and its worth 11.5K I think its well worth me chopping this in, and using this to make my shortfall up on my 50K mortgage.

I have about 10K>11K worth of shares that are pretty well just stable and wobble between 9k and 12K over the past couple of years..... The Divi's are nice though from time to time (SHELL)

So... Recap.... 50K + 11.5K = 61.5K + 10K Shares = 71.5K - What I need right at this moment for home improvements that can't really wait any longer !!!

I plan to pay off the mortgage early... possibly before Aug 2013, but will hang on if possible..... 3% sting.... (so the extra 19K at 3% saved)

So..... If I get stung.... I'll save 3% of my 11.5K as I'm chopping this in.... I will also save interest on this amount too.... and will also use the premium saved to over pay so extra interest savings (Will overpay as much as I possibly can too).... Mortgage is 3.75% , so can't see my ED growing by 6-7% in the next year ????

Questions.......

1) Does this sound sensible chopping in the ED to Save on the Re-Mortgage in the "short term"... I think so , as I do have a gut feeling I'll have to pay the 3% when I pay off early with redundancy money.

2) I was told that If I surrender my ED, I may be liable for TAX (This was taken out to pay off a mortgage and not an investment, so I think NOT)

3) How much more could I expect to get if I sold the ED on..... instead of cashing it in ? Another 1K perhaps ?

4) Do my plans seem quite Savvy (Cashing in ED and shares sales ?) and I've done my homework ? ( I hope so !!)

5) Is it worth me perusing a mis-selled ED ?.... ( I think I'm wasting my time here, as I'm an honest guy not prepared to lie, and also left too late)

Thanks for your help guys.

Regards, Colin D from the Wirral.

hcb42

sheesh I am confused.

I think I have followed though, and have used the same logic to cash in an endowment in the past, rather than sinking good money after bad.

I dont think there is any tax implication, I certainly dont recall anything. I did investigate the selling an endowment policy on -, but many are not suitable for that, so you might hit a brick wall there

Plans seem savvy and you have definitely done your homework

No chance on pursuing a missold ED so forget that and get on with the refurb work.

Spanner in works: How official/definite is this shutdown and offshoring, as it might affect a new mortgage application.

ColinD

hcb42 wrote: »

sheesh I am confused.

I think I have followed though, and have used the same logic to cash in an endowment in the past, rather than sinking good money after bad.

I dont think there is any tax implication, I certainly dont recall anything. I did investigate the selling an endowment policy on -, but many are not suitable for that, so you might hit a brick wall there

Plans seem savvy and you have definitely done your homework

No chance on pursuing a missold ED so forget that and get on with the refurb work.

Spanner in works: How official/definite is this shutdown and offshoring, as it might affect a new mortgage application.

Thanks..... I'm confused too !!!

Yes in a nutshell.......

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Borrow Less, 50k instead of 69K , saving any early repayments on the 19K extra ( So saving £570 ) and also saving interest (3.75% in first 2 years ) on this £19K less borrowed.

Use this interest saved and ED payments + extra cash to overpay but no more than 10% per year to avoid any repayment charges again !!

Make up the 19K (actually need about 22K) by Cashing in ED (11.5K - pretty much what I've paid into it) and Shares (about 10.5K) - Both of which are not growing much at all....

Pay off as much of Outstanding Mortgage (Hopefully the Lot) with Redundancy Money, also... hopefully just after the 3% early repayment charges end after 2 years !! - Gut feeling tells me I will get paid off before this period ends though....

Thats it really.... I think this is about as efficient as I can be with this.

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The ED company (Winterthru) did tell me I *may* be liable for tax if I sell.

Yes, Do not think I have a chance on Mis-sold ed, which is why I haven't bothered claiming.

Re- Spanner in the works... I'm *still* gainfully employed for the time being, but the future long term in the company looks bleak.... I may have to move to Hamburg for a couple of months to help out with the move too, that will look good on my CV.

I also have had the re-mortgage offer through, for 69K , but have spoken to them to change to 50K and waiting for the paperwork to sign off.

There may be longer term outlooks withing the company, like moving to Hamburg full time, if a job was on offer (Prolly 10 years of Stability), But I think it will be better riding the storm out and getting the pay off in about 2 years time and I then have 6 months notice to find another job and stick around in the UK (hopefully locally) as I love where I live and it's near my family.

The first letter will warn me of impending/possible redundancy , thats 9 months notice but thats a warning shot.... 2nd Letter will give me the figures 3 months later with 6 months notice and warns me I need to find another job internally or outside with a different employer. *Hopefully* won't be getting any letters this year, put it that way , so I'm safe for the time being !!!

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I have about 2K in Savings in the Bank , and another 3>5K in other investments (SAESOP and Share Save Plans

Can't really touch these investemts yet, but they are my 'emergency fund' if required..... £1500 in the SAESOP needs to sit there another 3 years as I will have to pay the tax back if cashed in earlier - cost me about £1000 and the rest was out of tax I didn't pay - The Share save plan I have about £1500 in and will keep this running while I'm still employed so will get another £1k in there I hope and lets see if the shares rocket up !!! - If they drop, I just get my cash back when that ends).

I may also have some other spare cash in the bank (another 2K-3K, but I won't know if I can use this for a few months at least - I have a court case regarding access to my children and have put 5K aside to cover this which is about the max it will reach if it draws out to be a long one - if we come to an agreement early on, I have the extra cash !! - She gets Legal Aid - Boo !! ).

I have about 4K on credit cards, but I'm paying low interest rates and will pay off these with next years bonus possibly - or any money saved with the court case !!

### The Main plan ### is just to reduce the Mortgage as much as I can and pay off as soon as possible with my redundancy and then find another Skilled Job ideally locally. I should be financially sound, BUT I feel its a lot safer to borrow less up front, and makes sense financially too.

Thanks for concurring my plan, yes I think its the most savvy thing to do at the moment.

Cheers, Colin D

dunstonh

8% Growth = 38 K (pipe dream perhaps, lol ?)

You havent told us anything about the endowment. So, we cant tell if its a pipedream or not. However, when you consider that the long term average for a basic balanced managed fund is in the 7% to 8% range and they only fell back to an average of over 5% during the last 10 years (which is recognised as a bad period) then it is certainly possible but it depends on the investments.

5) Is it worth me perusing a mis-selled ED ?.... ( I think I'm wasting my time here, as I'm an honest guy not prepared to lie, and also left too late)

A complaint would require you to be dishonest. Plus, over 3/4 of endowments are now time barred from complaint.

2) I was told that If I surrender my ED, I may be liable for TAX (This was taken out to pay off a mortgage and not an investment, so I think NOT)

If it is a non qualifying endowment (rare) or has yet to qualify then tax is potentially an issue if you surrender early. You post indicates that it should have now met qualifying criteria and not have a tax issue.

3) How much more could I expect to get if I sold the ED on..... instead of cashing it in ? Another 1K perhaps ?

Not all endowments can be sold. It depends on the type of investments and how they are structured.

ColinD

dunstonh wrote: »

You havent told us anything about the endowment. So, we cant tell if its a pipedream or not. However, when you consider that the long term average for a basic balanced managed fund is in the 7% to 8% range and they only fell back to an average of over 5% during the last 10 years (which is recognised as a bad period) then it is certainly possible but it depends on the investments.

The projection was based on 8% Growth (around 12 years ago), which meets my 38K Mortgage... However after getting a few 'shortfall' letters from them, I think we can assume that alarm bells are certainly ringing.... (and most of this has been in this Bad 10 Year Period) - So I think it makes sense to ditch it, and make the money work for me and save me interest instead.

5% would give me about 28K - Which is what I kind of estimated anyway... ( 10K Shortfall ) , if I kept paying ( Need to put another 11K in)

So let's check the sums....

11.5K (What its worth now If I cash it in)
+
11K (To be paid over the next 12 years)

= 22.5K

So.... to Make Say 28K in 12 years, I need to invest 22.5K (kind of) , to give me 5.5K profit

I think I can do better or just as well saving interest on the mortgage, or its a close call at least !!!

PLUS... Plans have changed for the short term anyway and I'll *hopefully* be mortgage free in 2 years or less, Saving LOTS of interest !!

As I stated above my plan is......

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Borrow Less, 50k instead of 69K , saving any early repayments on the 19K extra ( So saving £570 ) and also saving interest (3.75% in first 2 years ) on this £19K less borrowed.

Use this interest saved and ED payments + extra cash to overpay but no more than 10% per year to avoid any repayment charges again !!

Make up the 19K (actually need about 22K) by Cashing in ED (11.5K - pretty much what I've paid into it) and Shares (about 10.5K) - Both of which are not growing much at all....

Pay off as much of Outstanding Mortgage (Hopefully the Lot) with Redundancy Money, also... hopefully just after the 3% early repayment charges end after 2 years !! - Gut feeling tells me I will get paid off before this period ends though....

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Yes, I appreciate that borrowing money is a risky business, but I feel that I'm taking a few precautions here to cover myself as much as I can.

Thanks for your advice guys, Its *good* NOT to hear words like 'DONT DO THAT' or things to that effect.

Colin D

dunstonh

The projection was based on 8% Growth, which meets my 38K Mortgage... However after getting a few 'shortfall' letters from them, I think we can assume that alarm bells are certainly ringing.... (and most of this has been in this Bad 10 Year Period) - So I think it makes sense to ditch it, and make the money work for me and save me interest instead.

That would not be satisfactory justification if it was done officially under advice.

Even funds that are on track for surplus by the way they work can give shortfall projections due to the way the projections work.

e.g. an endowment with a 7% target growth rate will show a shortfall at mid rate projection on the very first day before a payment is even made. That doesnt mean it will fall short. Its all about the capability of the investments to hit that target. My investments have averaged over 13% a year since 1994. Yet I still use 5% as target growth rates.

Also projections use rates of growth before charges where as performance is shown as return after charges. So, 8% projection on plan may only require 6-7% p.a.

So, shortfall warning puts you on guard but if the fund is capable of doing say 7% p.a. then you should reconsider.

If the endowment is naff and the investment options are poor then all you have to show is the alternative options are better and you have your justification (dont forget to cover the cost of replacement life cover and possible CI cover). If its an average endowment or a good one then the alternatives may struggle to be as good. e.g. if endowment is making 6% p.a. and its going to cost you £3000 to surrender and £4000 to pay it off on to the mortgage then you need to factor all that in.

Before you even show a profit you have to recover the £3000 and £4000 paid. (I'm using generic figures here purely for example purposes). 6% is beating your mortgage interest rate so at this time its unlikely you would ever profit as your mortgage interest is lower than the rate of return. Even if the endowment rate of return is not enough to hit the target amount.

ColinD

dunstonh wrote: »

Before you even show a profit you have to recover the £3000 and £4000 paid. (I'm using generic figures here purely for example purposes). 6% is beating your mortgage interest rate so at this time its unlikely you would ever profit as your mortgage interest is lower than the rate of return. Even if the endowment rate of return is not enough to hit the target amount.

Thanks, I'll be sorting all my insurance out too and am juggling that.

Like I say.... Its highly likely that I'll have to pay my mortgage off within the two year repayment charges period... so I'm 3% down already.

I'm not a gambling person, never have been and should have switched to a repayment morgage a few years ago (or just overpaid the existing one - didn't think of that !!) , but I've never been that Savvy, only in the past couple of years has the penny dropped....

I also realised that I'll feel a lot more secure and won't worry so much borrowing less from the Bank.... so its worth that to keep me sane !!

I have about an 18 month Window to pay off as much as I possibly can from Mortgages and Credit Card (4K) while my Job is secure, so am going to GO FOR IT.... This is about as SHORT Term as it can be.... so long term stuff goes out of the window for the time being....

My plan is to keep a roof over my head and pay off as early as possible, it will be all mine then and I can worry about future investments when the time comes... plenty of time yet !!

I'm 40 this year, and will have about 20 Years worth of a good pension that I can claim at 55 if I wish (with 15% reduction) or hang on in till I'm 60 and get the full one.

Thanks, Colin D

ColinD

One more thing to consider..... My 3.75% fixed rate finishes in Aug 2013... and then its onto the standard rate (currently 4% and the early 'pay off more than 10% of outstanding balance and we do you for 3%' charge ceases)

The best option for me, will be to get my redundancy at around this time and pay off just after avoiding the 3% , and my over payments should get me down from £50K to £39K in that time.

A 50K mortgage is about £260 a month (based on 25 Years), I plan to pay about £600 a month in.... Thats around £4000 in overpayments per year....

After the first year, I'm down to 45K (so my 4K overpayment is well withing the 10% of the 50>45K loan)

If I can make it for another year with the Job..... I'll be down to about 39K (4K is less than 10% of 45>39K )

If I get made redundant and paid off earlier than this It may be worth waiting till Aug 2013, but will have to weigh things up carefully to make the best saving at this time....

My estimation is that I have around 18 months left..... as soon as I get the letter with 9 months notice, I'll be living off Supermarket own Brand beans and stash as much money aside as I possibly can...... In fact... I've started to cut back already working all my bills out.

Of course.... I could keep the ED going for another year or two, but I think its time for drastic short term hand brake turn.

I'm also gambling here that the rates may well rocket up on repayment interest rates, so filling my boots while I can... and that makes sense too.....

I think in just over 2 years time, I'd certainly pay a LOT more then 4% on a Mortgage..... Bank of England Base Rate will NOT stay this low surely for ever ? - I reckon 1% rise in the next two years at the very least, but thats pure speculation on my part.....

Cheers, Col