Longwinded endowment question:

Desperado99

Bear with me

We currently have a £39k mortgage, which is part repayment (£9k) part interest-only (£30k) which has 9 years left to run. Our endowment is currently valued at £15k. Mortgage APR 2.5%

We're currently on the market and I'm planning on spending an extra £60k (initially at 2.79% then 3.99% after 4 years) We can port our existing mortgage and would extend the term to 25 years (although we hope to overpay to decrease the term) We can, if we wish, change it all to repayment.

So, which is better:

a) £100k mortgage over 25 years inc £30k interest only....... pay off lump sum of £30k in 9 years

b) £85k repayment mortgage over 25 years, (endowment cashed in now and used as a cash deposit), overpaying by £50 per month (would have been paid to endowment previously)

FYI the endowment was originally £39k but we adjusted it when we started getting the warning letters.

Thanks in advance

D.

JimmyTheWig

A few questions...

1. Are the endowment company able to give you an estimate of what it will be worth at maturity? (I'm guessing that it is around £30k from what you have said.)

2. How much per month are you paying for the endowment?

3. The mortgage rate often depends on the amount of money you are borrowing. Will you get the same rate for borrowing £100k as borrowing £85k?

4. Have you confirmed that the lender will allow you to keep the £30k as interest only? (This is a different question to whether you are allowed to port the mortgage.)


P.S. Well done for adjusting mortgage to part repayment after the warning letters. Most threads about endowments are people who haven't done that and are now running out of time!

Desperado99

1. Our latest projection (they give us 3 percentages and we always base it on the middle one) shows it may just limp over the line at about £30k....... it's like trying to look into a crystal ball

2. £52.82

3. It would be the same. so 2.5% variable on the first £39k and 2.79% (initial rate) on the remaining.

4. That's a thought. I would say they would as when I initially rang and asked how much we could borrow they calculated it with the £30k interest only. something to confirm though.

holly_hobby

Its important to remember that you can not transfer mortgage borrowings from 1 property to another - the term porting actually relates to the mortgage product (fixed, tracker, etc), but not the underlying borrowings it applies to.

This means that your new 100k mge (or less if you increase your deposit) on your new house, will be subject to full underwriting as per any new mortgage applicant. And if they accept new IO business, and are happy with the current projections of the endowment as a repayment vehicle, you would have 30k on IO and 70k on repayment.

LCE Policy
The current estimates maturity value certs (EMVs) you are receiving are based on industry prescribed rates, so may not be an accurate reflection of how your own policy is acutally performing, which may be better (including the addition of any terminal bonus (TB) at maturity - which are getting a little rare now) or worse (depending upon the actual performance of your providers funds).

You say its current SV is 15k - to assess how your plan and your provider have actually performed to date, and how they may continue to perform, review your historical annual bonus statements, where on each occassion the provider will delcare the actual % of bonus added to your plan (which are reversionary bonuses, meaning once added can't be removed). Having reviwed them, are the declared bonuses (esp over recent yrs), increasing, remaining static, or declining .... ?

This will give you a very rough basis to guess to how likely it may be that the policy will meet its target value, or its likely end value (minus any TB of course), and based on the assumption that the provider will continue to add an annual bonus (which isn't gte'd), and if so if the declared rates are likely to remain along a level to recent awards, or continue falling. This is a VERY crude calculation, and of course the future addition and level of bonuses awarded is not gte'd, so it is all guess work .... but will give you a more accurate reflection of performance (and whether best to continue maintaining), than the current standard EMV statements you are receiving.

If you do elect to surrender the policy (remember you will lose the life cover, any ancillary benefits, and any mortgage promise - so check this out before you cash your chips in !), and IF you able to secure a net deposit return in excess of 2.79%, I would consider depositing my 15k (or whatever) there. And then when your mortgage rate increases to parity or exceeds your best available net return, withdraw it and whack it off the mortgage, to reduce the mge borrowings, and your chargeable mortgage interest (keep within ERC free paramaters on the element of mge redeuced - which tends to be 10% when in a product term).

Hope this helps

Holly

Desperado99

It does help, thanks Holly Hobby.

That gives me another option to think about.

JimmyTheWig

Desperado99 wrote: »

1. Our latest projection (they give us 3 percentages and we always base it on the middle one) shows it may just limp over the line at about £30k....... it's like trying to look into a crystal ball

2. £52.82

Definitely worth doing what Holly suggested in terms of working out how much you think it might be worth in 9 years.
Another way of seeing this is, looking through previous annual statements, how has the middle projection changed over the last, say, 5 years.

If you cashed it in now and used the £52.82 a month to pay off your mortgage, in 9 years your mortgage would be reduced by
15,000 cash in value
4,215 savings on mortgage interest from the £15k
5,705 9 years of extra monthly payments
776 savings on mortgage interest from the extra monthly payments

This comes to £25,696. So that's what your endowment needs to beat. If you think it will get you more than this (e.g. nearer the £30k mark) then keep it. If you think it will get you less than £25,696 then cash in now.

holly_hobby

Don't forget as part of your considerations and before you surrender, to check what other benefits and any MEP (mge endowment promise) that will be lost on cancellation, and how the cost of any replacement plans you may want to effect will affect the overall gain/loss ratio.

Hope this helps

H x

Desperado99

JimmyTheWig wrote: »

Definitely worth doing what Holly suggested in terms of working out how much you think it might be worth in 9 years.
Another way of seeing this is, looking through previous annual statements, how has the middle projection changed over the last, say, 5 years.

If you cashed it in now and used the £52.82 a month to pay off your mortgage, in 9 years your mortgage would be reduced by
15,000 cash in value
4,215 savings on mortgage interest from the £15k
5,705 9 years of extra monthly payments
776 savings on mortgage interest from the extra monthly payments

This comes to £25,696. So that's what your endowment needs to beat. If you think it will get you more than this (e.g. nearer the £30k mark) then keep it. If you think it will get you less than £25,696 then cash in now.

This is why I love MSE :money:
Thanks Jimmy