The Mortgage Clinic: 'Can I still use my old endowments?'

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The Independent Online

Q. I have two small endowment policies from old mortgages - one for £49,000 and the other for £18,000. A few years ago I found out that neither is likely to reach its target, and as that made me feel uneasy, I switched to a repayment mortgage when I moved house recently. To build an extension, could I now borrow against these old endowments? After all, I still pay into them each month. GM

A. There are probably quite a few readers who have old endowment policies that they no longer rely on to pay off their mortgages, but where they still pay the premiums. And it is relatively straightforward to borrow against an endowment.

"It is a possibility to secure a loan against a with-profits endowment policy," says David Hollingworth, director at mortgage brokers London & Country. "It would work in a similar way to a mortgage secured against a property, with the amount advanced limited to a specific proportion of the surrender value. The policy is then assigned to the lender."

But just as there are fewer people taking out endowment mortgages, there are fewer lenders willing to use endowment policies as security.Newcastle Building Society is one of the few. It charges 3 per cent over LIBOR (London Interbank Offered Rate). LIBOR varies but last week was 5.35 per cent, or 0.1 per cent more than the Bank of England base rate. Here, you would be paying 8.35 per cent for your loan for your extension; more if base rates go up.

This could make borrowing against the endowments more expensive than taking out a further advance from your mortgage company, remortgaging to release the capital, or possibly even taking out a personal loan.

If you have been in your home for a few years and built up some equity, you should be able to remortgage, assuming you have the income to support a larger loan. If your income is short, borrowing against the endowment might not help you in any case, because the lender will need to take your main mortgage and other commitments into account before offering money.

If you can remortgage, then Hollingworth recommends that you check the fees for the new loan, as well as any costs for leaving your existing lender, such as early redemption penalties.

A final option is to sell your endowment policies. Assuming that you are not relying on them to pay back the mortgage or any other debt, trading the policy should raise more than simply surrendering it to the insurance company. You should seek independent financial advice before taking this step.

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