Should I surrender SL Endowment Assurance & Homeplan

EdInvestor

madwalker wrote: »

One additional question - having looked at these figure - if I am single, and the house is worth twice as much as the mortgage - do I need the life assurance or should I cancel it & put the premiums towards the overpay of the mortgage?

It always saves time and effort if you actually read what the original poster says. :rolleyes:

With a mortgage interest rate of % and the effect of compounding, surrender will still win out even if you put the best possible gloss on terminal bonus potential and the "promise" (I seriously would not place any reliance on this BTW).

The problem with virtually all endowments now with interest rates at the current level is that the premium you expect to get for taking a risk has completely disappeared.

Most people will actually make more money from using the safe alternative - junking the endowment and paying off a slice of the mortgage. :eek:Formerly this was only clearly the case with 'zombie' endowments.But now it applies virtually across the board.

jamesd

EdInvestor,

madwalker wrote: »

My interest only mortage is 86,000. I am on a fixed rate (4.99) which finishes at the end of this month. However I am in the process of selling my house, ... so will just go onto variable rate (7.15), and they review mortgage when I get a new house.

EdInvestor wrote: »

With policy 1 if you surrendered it and paid the lump off the mortgage @ 7.15% also paying in the premiums to maturity your return at the end would be 28,979.

Please say more about how you calculated the expected return. In particular, please say whether you used the until the house is sold SVR instead of a more reasonable long-term mortgage rate in the 5.2% range.

EdInvestor wrote: »

With a mortgage interest rate of % and the effect of compounding

Please fill in the missing mortgage interest rate you're assuming.

EdInvestor

Well done james. You have spotted something that others have not.;)

You know that the SVR is going to come down from 7%+ to 5.25% pretty well immediately, do you? How do you know that?

I think you should also note that the OP is already overpaying 300 pounds a month at 7%+ and will have a further 137 pounds available to overpay immediately if she surrenders her endowments.That makes a total of nearly 30k she will be able to pay off in the next two years,getting rid of her shortfall completely.

After that a switch to repayment at the lower interest rates you mention, which hopefully will have returned by then, should remove the worry once and for all at little extra cost.

dunstonh

Ed, you cant gloss over the terminal bonus. It's where most of the return is going to be in future and currently, many plans have very good bonuses. You also cannot gloss over the mortgage promise value that would be lost totally if surrendered. Thats a value of £4k-5k that is guaranteed to be lost on surrender.

Some things with endowments you have to estimate but where factual data exists, it should be included.

At this time, you have used a higher mortgage rate than that which is generally available, you have ignored the terminal bonus and ignored the mortgage promise payment. Plus being an old SL plan, the projection is likely to understate the current position (reflected by the figures of the current position being higher than the 4% projection figure).

Mr_helpful

hmmmmmmm I dont suppose you could let us all have your crystal ball eh ED
Given the apparent safety of a repayment mortgage especially at high interest rates (which currently we do not have) I am wondering how an endowment ever got sold in the first place seeing as their best sales came in times of much higher interest than we have now. You have got to admire the marketing skills of Royal life who got the ball really going in 1971 with their low cost endowment.

EdInvestor

I used the rate the OP is paying now - that's the return she would get on her money if she paid a lump sum off her mortgage now.

One really musn't sugar coat the position for endowment policyholders at SL.

#The WP fund is less than half in risk based assets, so it's going to be lucky to make double digit returns anyway.

#A large number of policyholders have pension funds with a 4% guaranteed investment return per year.So up to half the gain goes straight out immediately, with endowment policyholders getting no share.

#The result is a 4% return long term return for an endowment policyholder is going to be a real struglle the SL fund for this class of policyholder is basically in zombie territory

#Payouts are still declining: terminal bonusus are still going down

# I think you'll wait quite a while before mortgage rates are back down at the 4% level, the way the economy is performing

BTW it's interesting to note how many (alleged) IFAs and mortgage brokers suddenly seem to be on this case. One wonders why the sudden efforts to challenge calculations routinely done on this site for well over a year?

Are the banks getting worried that people will start using surrendered endowments to pay off all those profitable mortgages they have out at 7% standard variable rates?

Might be a bit of a blow, given the money they are having to pay out in refunds for illegal charges at the moment.

dunstonh

#Payouts are still declining: terminal bonusus are still going down

Standard Life increased the terminal bonus this year as did most of the other providers.

#The result is a 4% return long term return for an endowment policyholder is going to be a real struglle the SL fund for this class of policyholder is basically in zombie territory

4% is what they are managing at the moment.

BTW it's interesting to note how many (alleged) IFAs and mortgage brokers suddenly seem to be on this case. One wonders why the sudden efforts to challenge calculations routinely done on this site for well over a year?

I have mentioned it before but got tired of repeating it as you never take notice of facts which go against your biased views. This is normal for you though.

Are the banks getting worried that people will start using surrendered endowments to pay off all those profitable mortgages they have out at 7% standard variable rates?

I dont see any bank posting here. Don't try and steer the conversation away by making up some silly allegation to cover your own mistakes.

On endowment 1, the current position is over £24,000 plus final bonus (which we still dont know). That could easily take it to £26k-£28k. The surrender value is £10094. The cost to keep going until maturity is £5700.

You are telling the OP to give up around £16,000 now when the cost to keep going to get that £16k (plus future bonuses) is only around a third of that.

EdInvestor

People forget when comparing performance about the life assurance element and when cashing in an endowment they find replacing the life assurance is often not as cheap as they thought.

Not really relevant to this thread,as the OP doesn't need to do it, but actually the cost of life cover has come down a lot in recent years and is not expensive to replace if peope have no health issues.Many people are already covered at work though and are paying extra for endowment life cover they don't need.

The other problems with endowments are the high charges on these old fashioned obsolete policies taken out in high inflation days and the tax ( as well as the change in the investment mix in WP endowments). Even if people don't want to use the money to pay off their mortgage, they will almost always be better off switching to a modern equity investment with low charges in a tax free ISA.

jamesd

EdInvestor wrote: »

You know that the SVR is going to come down from 7%+ to 5.25% pretty well immediately, do you? How do you know that?

"I am in the process of selling my house". It's going to come down to 0% within months.

With equity in a prospective new purchase likely to be above 50% and assuming no history of bad debt the poster is going to be qualified for the best mortgage rates in the market.

EdInvestor wrote: »

I think you should also note that the OP is already overpaying 300 pounds a month at 7%+ and will have a further 137 pounds available to overpay immediately if she surrenders her endowments. That makes a total of nearly 30k she will be able to pay off in the next two years,getting rid of her shortfall completely.

"the house is worth twice as much as the mortgage". I'm not greatly concerned at the possibility that the poster will have a shortfall and be unable to pay off the mortgage.

Useful information for the poster is whether the endowments are beating say 5.5% before inflation, a reasonable mortgage interest rate. The numbers from Gorgeous George and dunstonh suggest that they are likely to do so, particularly once we consider that they have had to deal with a poor market period for a substantial part of their current age.

Then we can move on to considering whether the poster is better off selling them and investing in other things, like a stocks and shares ISA holding funds. For that we'll need to discuss the poster's attitude to risk to see if it's likely to produce returns that exceed that of the endowments or not.

One certainly bad deal: selling the endowments now to clear a mortgage that is soon to be cleared by selling the property it's on.

EdInvestor wrote: »

I used the rate the OP is paying now - that's the return she would get on her money if she paid a lump sum off her mortgage now.

Which is complete and utter rubbish when you know that the property is being sold and know what current mortgage interest rates are for people taking out new mortgages. You can do better than this. Please do.

Mr_helpful

So lets be clear Eds advice is to cash in all 3 endowments which have already paid upfront, charges for a much longer term, sacrificing bonuses which are now being added without such a heavy effect of charges and life assurance and at a time when SL are increasing terminal bonuses.
With the OP getting rid of mortgage the better question is will her money beat inflation and by keeping the endowment for the last few years it almost certainly will. I would believe Dunston and James anyday over this biased and inaccurate advice to cash in the endowments.