cash in endowment 17 months early or take out bigger mortgage?

Andy_ArT_Trigg

I've put my house up for sale. It has around 17 months left on the mortgage which is made up of part repayment and part endowment policies.

My endowments have done well under the circumstances and if I cash them in tomorrow they will already be about £1300 more than I need to pay the mortgage off.

My options are to either use the cash from the house sale to clear the mortgage and then continue to pay the endowments a further 17 months. Then (hopefully) get a lot more for them, which I can use to reduce the new mortgage - but this will mean I have to initially borrow £22,000 more on the new mortgage until I get the endowments cashed in - in 17 months.

The second option is to cash them in now, pay off the morgage and borrow £22,000 less.

Which makes most sense? Am I likely to get much more for the policies when they have matured than cashing them in now? And if so, will the extra interest I will have to pay for the 17 months until they mature cancel out the benefits?

silvercar

generally the terminal bonus paid on policies would make it worthwhile holding onto them. just make sure you can overpay without penalties on your new mortgage.

Andy_ArT_Trigg

Thanks. The 17 months premiums will be £600 and then there would be 17 months interest on the extra £22,000 I'd need to borrow to clear the current mortgage without the endowments.

I don't know how to work out the interest on £22,000 over 17 months, but are the combined extra costs likely to be much less than the expected extra endowment value at full term?

EdInvestor

Which company is the endowment provider?

Andy_ArT_Trigg

Main one was with Scottish Amicable but got taken over by Prudential some years back, and the smaller one is with Legal & General

Cheers

EdInvestor

Have a trawl through here for some sample TB rates:

http://www.foster-and-cranfield.co.uk/endowment-auction-catalogue.htm

Mr_helpful

anyone who advised you to cash in your endowment with only 17 mths to run would probably get shot by the FSA

MortgageMamma

Has someone told you to encash these endowments or did you think of that by yourself? It would be really unwise to do anything with them if you only have 17 months to run - the penalties would most likely outweigh the potential benefits of doing so. Have you received written surrender values from your endowment providers?

EdInvestor

It should be mentioned that endowment payout values are still falling at most insurance companies: so it's possible that the OP would be better off by cashing in early - that's been the case for the last few years at quite a few offices.

It didn't used to be this way of course, it's a result mainly of the stockmarket crash in 2000-2003. The "smoothing" process of WP policies mean that the full effects of that take years to feed through to policies - which can produce the kind of anomaly we are talking about here.

Example from a year ago:

This is Money

Although ScotAm was the only office on the list to increase its payout, the tiny increase would have meant that if the OP had waited, he would have lost out because the additional premiums would have been wasted.

So he's quite right to ask the question.

dunstonh

It should be mentioned that endowment payout values are still falling at most insurance companies

Apart from those that are going up and more have gone up in the last year than gone down.

Example from a year ago:

Which reflects the position last year. Not now

if the OP had waited, he would have lost out because the additional premiums would have been wasted.

What about the guaranteed sum assured that would have been reduced if he had surrendered. Its not just about what you could make elsewhere but what you would lose in surrendering early.

Any alternative has to beat the penalty and what the endowment makes to show a profit. A 10% penalty and a 3% annual bonus rate would mean the alternative would have to be worth more than 13% to put you in a profit.

jamesd

From the link EdInvestor posted, about Scottish Amicable 25 year policies: "paying a Terminal Bonus equal to 51 per cent of the Sum Assured and attaching Reversionary Bonuses".

At 5% the mortgage for 22,000 for 17 months will cost about 1574 in extra payments. Total of 2174 in costs to keep the endowment.

It seems very likely that you're better off keeping the endowment. If you do, please post the result here when you know the answer.