Endowment compensation offer

dbs

Been offered compensation by Britannia building society £2,660 on a £20,000 endowment with 5 years to go to be put back in the position of a repayment mortgage.
Surrender valve of endowment is £9667.74.

Is this a fair offer of what a repayment mortgage would have been?

EdInvestor

Hi dbs

The offer is based on a formula whoch involves

1.You surrender the endowment
2.Pay both the surrender proceeds and the compo money into the mortgage to reduce its size
3.Increase the monthly mortgage payment by the amount you're currently paying in to the endowment.

If you do all that, then your mortgage should be paid off at the end of the term without it costing you any more than you're paying out now.

Froggitt

No it wont - or more accurately, its unlikely to.

Thats because the compo generally doesnt cover the shortfall, and you will have to increase your monthly payments to cover the shortfall.

EdInvestor

If dbs does as I suggest,there will be no shortfall.

Froggitt

No you are wrong. Please stop repeating bad advice.

Using round numbers, the interest element at 5% on £20,000 is about £1000 per annum and the endowment element about £30 per month.

They guy above will have to find another £8,000 to pay off the mortgage (20000-2660-9667), plus another £2,000 (5% of 20000-2660-9667 x five years) in interest......about £2,000 a year......about 60% more than he is currently paying.

Leaving his payments at the same level will leave a shortfall of £5000 or so at the end of the term.

Froggitt

PS And if you look at the FSA endowment documentation, even they talk about making arrangements to pay off the shortfall once the compensation has been settled.

dibbs26

I thought that once you had put your compo and surrender money into the the mortgage and converted it to a repayment then at the end of the term you should owe nothing........................or is it me ?

Froggitt

All the compo does is put you into the situation that you would have been in were you have taken out a repayment mortgage in the first place.

I believe the calculation takes your monthly interest and endowment payments and calculates where you would be if instead it had been a repayment basis. But (big but) they always quoted large percentage returns, so you only needed small monthly endowment payments.....making it look better value than a repayment mortgage. So youve not been paying enough over the years to repay your mortgage.

The compo is therefore not usually (never???) enough to take you out of a shortfall situation.

sleepless_saver

After reading this thread, I did the calculation Editor and Dibbs think should work on what I have been offered on my endowment.

Deducting the compensation and the surrender value from the original sum, and diverting what would have been the endowment monthly premium to the monthly repayment, I could repay it in full within the remaining 12 years without increasing cost - BUT only if the interest rate was 3.6%:rolleyes:.


So it's a nice idea and I really wish it did work without increasing the payments. But sadly whether or not you have to increase the amount you pay every month depends not only on what compensation you get (which depends on the past not the future), how much you sell the endowment for and the level of interest rates in the future.

Froggitt

Yes - in effect using the savings on the interest to pay off the shortfall.

dunstonh

You also have to factor in that for a period of time, endowment mortgages were cheaper than repayment mortgages. So you were paying in less than you should have been on a repayment mortgage. The cost of comparable life cover is also deducted from the compensation.