Keep the endowment or pay off the loan?

dunstonh

Having read all of Martin's posts and advice about paying off stuff before saving

Which would offer an opinion which is not always the case. Many of us have been borrowing money at 4-6% p.a. but getting returns far in excess of that. Endowment mortgages actually tend to be a little cheaper than repayment mortgages so converting may cost you more.

jamesd

What's the interest rate on the loan that you'd pay off with the endowment if you sold it? How much is the outstanding loan amount?

If it's over 10% then selling the endowment is likely to be the best course if the endowment value today is comparable to the loan value. Harder to be certain if it's below 10% but even 7% or 8% on the loan makes it look quite good to repay it.

Investing is likely to beat a repayment mortgage if you invest fairly well. But that could be in a stocks and shares ISA instead of an endowment policy. Better investment choices that way.

Martin's advice seems generally to be to pay off if the interest rate is greater than that you can get by not paying off. With the mortgage at 4.64% it definitely doesn't make sense to actually pay off the mortgage unless you're a higher rate tax payer. Everyone else can get savings interest rates above that. But it still might make sense to sell the endowment, pay off the loan and save or invest the remainder plus the future monthly payments. That could wait until you're done with repaying any remaining high interest rate debts.

EdInvestor

Post the maturity forecast when you can get it.There's no point in doing a calculation until we get that as there's nothing to compare the figures with.It would be helpful if you could update the surrender value.

Charley_Farley

I've only just received the figures from Scottish Widows - the current bid value is £8489.12 and maturity date is 18/12/21. The illustrative future benefits are 4% £22900, 6% 29800 or 8% 38500. Are these the figures you meant? I can't believe it was so hard to get them!

EdInvestor

Well done Charley.

Just one more figure: the interest rate on the loan which you would use the money to pay off?

Charley_Farley

It's 7.7% for the loan, but if I redeemed the endowment, there should be enough to pay a bit off the mortgage too? That's fixed at 4.64% for another 2 years.

Either that or look into an equity release type deal maybe?

Charley_Farley

I guess not = there is more than enough equity in the house to cover the mortgage at present - it would just cut down what the kids would get.

jamesd

What is the early redemption cost of the loan? The lender will tell you if you ask. Alternatively, how many repayments left?

EdInvestor

The illustrative future benefits are 4% £22900, 6% 29800 or 8% 38500. Are these the figures you meant? I can't believe it was so hard to get them!

It's a bit difficult not knowing how much the loan is, but if you surrendered the endowment and used the lump sum to recduce the loa @7.7% also paying the endowment premiums to over pay the loan to maturity, the total return you would get would be 48,291

If you did the same thing but paid off the mortgage @ 4.64% your return would be 35, 278, which is better than the 6% projection from Widows.

I would bin the policy and pay down the loan first then the endowment for a guaranteed bird in the hand which will likely be higher than the one in the bush.

dunstonh

Scot Widows unit linked range offers better potential than 6% with a decent unit linked spread. Plus, the old Lloyds bank plans lower the charges later in the term by giving a 105% allocation rate.

If you accept the investment risk, this could end up being a low cost investment plan. Plus, surrendering at this time may not be the best thing to do. However, monthly contributions are now buying units 15% cheaper than a month ago.