Good idea to cash in unit linked endowment?

scatmanjohn

Hi everyone.

I currently have an unit linked endowment which needs to pay off £31000 mortgage.

I pay £110 p/m at the moment (it increases each year in line with something or other;) )

Any how, its well on track to pay off the amount and is currently worth £16500 with 12 years still to go.

In a couple of years i will have about £15000 in shares to cash in.

Does anyone think i would be best to cash in the endowment and pay off the mortgage with my shares money.

My thinking is, i will save £18000 in interest payments on my mortgage.


I have read the bumf on the Friends Provident site and they seem to say its a bad idea (they would ,:rolleyes: )

Thanks for any advice

dunstonh

I have read the bumf on the Friends Provident site and they seem to say its a bad idea (they would ,:rolleyes: )

They have a requirement to say that as a warning as surrender usually results in a penalty. They are also not allowed to give advice so it appears on paper whether its the right thing to do or not.

Without knowing your charging structure, tax position, life cover requirement (or CI/waiver if included) or investment choice, we cant tell you if its a good idea.

jamesd

scatmanjohn, you save the interest on the mortgage and you lose the interest or gains on savings or investments. Savings and investments are currently at higher rates than competitive mortgage deals, so in general you will lose out by overpaying instead of saving or investing.

What is worth doing is checking how the money is invested and improving that. The endowment is probably performing less well than alternative investments you could have in a stocks and shares ISA, so switching to that method of investing may well improve your situation. Whether it's worth doing depends on any penalties for leaving the policy and the level of risk and likely return from the alternative investments.

EdInvestor

What interest rate are you paying on the mortgage?

What funds is the endowment invested in now? (I assume FP is the provider?)

Are there other choices?

scatmanjohn

EdInvestor wrote: »

What interest rate are you paying on the mortgage?

What funds is the endowment invested in now? (I assume FP is the provider?)

Are there other choices?

The interest rate is currently 5.75%

The endowment is invested in Freinds Provident ex L&M Flexible fund
http://http://customer.friendsprovident.co.uk/fund_centre/life_funds/performance/index.jhtml

The reason i want to do it is i like the idea and freedom of being mortgage free

jamesd

If the endowment continued to do only as well as it has done so far then you'd lose about 23000 in gains from it, compared to that saving of 18000 in mortgage interest.

If you have the full range of funds available you might usefully switch to a more varied selection, since some are likely to do better than the one you're currently in, notably some of the external ones.

It's very likely that you'll be significantly better off by keeping the mortgage until it ends, then taking the value of the endowment, or cashing in the endowment and investing the money elsewhere. Same for the shares.

Even switching the mortgage payments to investing in the future won't provide sufficient gain to compensate for losing the current capital value of your investments.

However, if you simply want the mortgage gone, this won't matter: that may make you happier than the financial benefit you're likely to see by not doing it.

scatmanjohn

Thanks James.

Something to ponder over i think.

Which of the other funds do you think may be a better option.

jamesd

scatmanjohn, do a search on "sector allocation" and "asset allocation", then I'd say pick some of the better performing funds to match the allocation that makes sense for you. A fairly risky set is reasonable if you plan to keep the investments until the end of the mortgage - it'll give much time to recover from any temporary drops. External funds are most likely to be interesting in the endowment.

Rabiddog_2

There are other things to consider as well, mortgage rates could go up in the future. Investment returns could be diabolical. Its better to have the bird in the hand than the fruit at the end of rainbow. I am currently looking also to surrender my endowments as I need the cash.

absolutebounder

Rabiddog wrote: »

There are other things to consider as well, mortgage rates could go up in the future. Investment returns could be diabolical. Its better to have the bird in the hand than the fruit at the end of rainbow. I am currently looking also to surrender my endowments as I need the cash.

Good quality short term advice there.