Analysis: Safe as houses? Red letters spell alarm to homeowners
Policy holders are being informed in colour-coded letters whether they face a shortfall on their home loans. Few will get good news
Tuesday 14 May 2002
Buying a home, once thought to be the safest and wisest thing people could do with their money, is turning out to be one of the riskiest.
Buying a home, once thought to be the safest and wisest thing people could do with their money, is turning out to be one of the riskiest.
In the 1990s millions of borrowers were devastated by negative equity when the value of their homes fell below their mortgages. House prices have since reversed their decline and begun a seemingly inexorable climb, but some homeowners are still finding themselves out of pocket.
The latest victims are the millions of borrowers who took out endowment life insurance products. Rather than repaying a chunk of their mortgage each month, endowment policy holders only pay the interest and then invest every month in an endowment scheme which, when the mortgage matures, is meant to cover the outstanding value of the home loan.
Unfortunately, because of low interest rates and a tumbling stock market, these endowments have failed to appreciate as planned and, in millions of cases, are not projected to cover the mortgage.
Anybody who is concerned whether they are among the unlucky ones will soon have their prayers answered – or fears confirmed – by a letter from their insurance company.
The correspondence is coded green, amber or red. Those receiving green letters can relax: their policy needs to grow at only 6 per cent or less a year to pay off their mortgage. An amber letter means that the endowment has to grow at between 6 per cent and 8 per cent a year: in other words, there is a serious risk that it will not match the mortgage. But it is the red letters that will really set the alarm bells ringing. They signify that a policy has to grow by more than 8 per cent a year, a very tall order if there are only a few years left to go.
So far 1.25 million of these letters have been posted, of which more than six in 10 are to people with policies in the red or amber categories. Spread across the whole population, this suggests that as many as 6 million households, involving about 15 million people, face a fretful future.
The problem goes back to 1984, when Nigel Lawson, as Chancellor of the Exchequer, abolished tax relief on life insurance premiums. Before then, borrowers were able to pay higher premiums, which comfortably covered the final repayment because of the tax relief available.
One example from those days of much lower house prices was a £6,000 mortgage, covered by the basic payout on the endowment, which after 20 years produced bonuses of £24,000, four times the mortgage. The policyholder kept that money to spend as he pleased. The premiums could have been a fifth of what they actually were and still have paid off the mortgage, but at the time that did not matter.
Once tax relief on life insurance premiums was abolished that type of plan became much more expensive, and all the more so when Mr Lawson's successor, Gordon Brown, finally scrapped mortgage tax relief two years ago, adding £17 to the average monthly repayment (in fairness, it had been whittled away by several Chancellors before Mr Brown).
Sellers responded by driving down monthly premiums, in effect placing less and less reliance on the basic guaranteed sum of money promised to come from these policies, and more and more reliance on their annual bonuses – which depended on the money generated from the payments by a rallying stock market.
In 1988, 84 per cent of mortgages were endowment-linked. But as years went by, sales people competed with one another by promising lower and lower premiums for any given size of mortgage and endowment, which meant increasingly heavy reliance on the bonuses to make up the difference. Now the risks have come home to borrowers: they may not have realised it, but they were playing the stock market as much as any City trader. When share prices took a turn for the worse, so did their mortgages.
The Association of British Insurers (ABI), the industry's trade body, says: "A slowing in the rate of growth of endowment policies is to be expected following the recent relatively poor performance of the stock market, and reflects a decline in investment returns generally."
Anna Bowes, of the independent financial adviser Chase de Vere, says: "The crux of the problem is aggressive selling. If sales people pretended that your endowment policy was going to grow by 10 per cent a year, then the premiums you would have to pay would be lower than if it was going to grow by only 5 per cent a year."
The Financial Services Authority, which regulates the selling of endowment policies, said yesterday: "We have always said that these are long-term investments, and with stock markets down 20 per cent it is no surprise that bonuses are down too. If you understood the risks at the outset and are uncomfortable now, you should look at it again. But if you were not told of the risks then you should complain to your endowment provider. If you are not satisfied you should ask the provider for a deadlock letter and complain to the Financial Ombudsman Service."
But, as the ABI points out, while stock markets have been dull in recent years, interest rates have been low too, so borrowers could have afforded to pay back more or save more elsewhere. The ABI said: "It is important to remember that consumers faced with lower investment returns are at the same time benefiting because interest payments on their mortgage are lower as a result of low inflation and lower mortgage rates."
That may be of little consolation to borrowers who thought that their endowment policies were sufficient to repay their home loan, and that therefore they were free to spend the money they were saving from those lower mortgage payments. Having in effect – and perhaps unwittingly – called the stock market wrong, they face a grim choice between digging deep into their pockets or possibly having to sell their home.
Of course, the stock market may resume its ascent and let borrowers off the hook. But either way, the crisis is sure to raise fresh questions about mis-selling scandals and the way in which some insurance companies inflate their profits and directors' salaries by persistently exposing their customers to undue risk.
It will also lay to rest the myth that investing in bricks and mortar is always the safest thing you can do.
How to escape the endowment trap
First, contact your mortgage lender. It will want to keep your business. The obvious option is to repay part of your loan but some lenders impose penalties for doing this.
If your lender is amenable, you can increase monthly payments. Then that part of the mortgage is guaranteed to be paid off.
Extend the term of your endowment and mortgage. This will cut monthly payments. But there may be additional charges and you will end up paying more.
Top up your endowment policy. This could be throwing good money after bad, and you are likely to face more charges.
Put additional money in a separate investment, such as a tax-free stock market individual savings account (Isa). This will work only if you have five years or more to go and are confident you can out-perform your endowment. Otherwise, save through cash Isas.
Shop around. The mortgage market is competitive at present, so go to an independent financial adviser (IFA) or visit bank and building societies' branches or websites. Check on strings attached to your existing deal.
You may need to dispose of your old endowment policy. Ask the provider how much it will give you, then see if one of the specialist firms who buy and sell policies if they can get you a better price. The biggest is Surrenda-link, phone 01244 317999.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Buying property overseas? Check out these hotspots
China stock collapse: Five things you need to know about 'Black Monday'
Kate Hudson's online sports brand Fabletics drains your account if you don't say 'stop'
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
Number of parents moving to their desired school catchment area is increasing, according to Santander research
- 1 Huawei Mate S and Huawei Watch: new products take on iPhone 6 Plus and Apple Watch
- 2 More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
- 3 If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
- 4 Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
- 5 German police forced to ask public to stop bringing donations for refugees arriving by train
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
Day In a Page
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.