Overpaying an endowment mortgage

saxonrosecliff

I've googled this on behalf of a friend and we are now both completely confused!

My friend has a endowment mortgage due to end in six years originally for £27,000. Of course the endowment policy has a shortfall which is currently around £6,000. I (I'm no financial advisor) suggested an ISA which she already has but she says that she has overpaid the mortgage payment to the building society each month and according to her mortgage statement as of today the outstanding mortgage balance is £21,500.

Would we be correct in thinking that this means that she now only has a shortfall of £500? As I said before I'm no financial advisor and neither of us can get our head round how an overpayment would affect an endowment mortage! If this is not the case what is the overpayment going towards? I'm really sorry if this is a stupid question!

holly_hobby

Her overpayments are gradually reducing her outstanding mortgage balance (ie the amount she actually owes the lender) - which will take some of the pressure off the endowment.

It should also be noted that the current estimated shortfall is based on prescribed industry wide rates of return. Accordingly it is just a projection, and the actual policy proceeds may be higher than currrently anticipated (yay !) or als lower (hopefully not) ... however whatever happens, your pal is being very sensible in dealing with this by overypaying ....

Of course to gte her mortgage would be repaid at the end of term, she could (if affordable) switch the whole lot to repayment and take all the pressure off the endowment, although she would lose the flexability re budgeting that she currently has.

Hope this helps

Holly

StuC75

Well much is dependent upon what happens over the next 6 years..

2 factors at play here..

1 - Interest only originally 27k which has now been paid down to 21.5k (no problem here).

2 - Endowment plan, originally scheduled for the 27k, which has a *PROJECTED* shortfall of £6k, to come in at Circa £21k

Projected being the key word, it is still some way off of the maturity date; yes if the markets \ performance carry on as suggested, and the shortfall remains at £6k, then it would only be £500 short of the mortgage liability..

If she carried on overpaying the interest only mortgage - then this would mean that any surplus money left over when the endowment matures would be paid back to her..

What is the interest rate on her interest only mortgage? is this the best place to be putting that money? or is it a better benefit to her reducing the interest only payment that she has to make..

amnblog

She is doing the right thing.

You may be confusing yourself by thinking of the mortgage as 'an endowment mortgage'.

There is not really any such thing as an 'endowment mortgage'.
She has a mortgage set up on an interest only basis on which she is only contracturally required to service the interest each month.

The intention was that the captial would be repaid at the end of the term from the proceeds of a saving policy (endowment) that she contributes to during the term of the mortgage.

When endowments were popular high inflation meant high growth on these policies and they would regularly meet and exceed their targets. Since inflation went into low single figures the returns on endowments are not longer there to the same levels.

Overpayments made by your friend are effectively treating the mortgage as a repayment mortgage (capital and interest). This means the final figure on the endowment is less crucial when covering the outstanding mortgage.

saxonrosecliff

I'm sorry for the delay in replying - I'm having some IT problems!

The mortgage is with Nationwide and the current rate is 2.5%. The best ISA around appears to, spookily, be Nationwide at 2% so it looks like overpaying is the better option.

We both understand how it all works now so thank you for your help. My friend was really happy that she has just about cleared the shortfall and now knows that if the endowment performs lower than they say she will be able to afford any extra shortfall with the money that she already has in an ISA.

Thanks again.