The nest egg that turned rotten

Many Brits who bought endowment mortgages face serious shortfalls. But should they sell up now? Christopher Browne asks the experts
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The Independent Online

Jonathan and Andrea Hewitt joined the space race after their second child was born. They bought a four-bedroom house in Camberley, Surrey at the right time and the right price, paying £150,000 for their new home in 1997. The couple took out an endowment mortgage, which they believed would give them a handy nest-egg when they were nearing retirement age. They built a garage and added a kitchen extension and completed the family unit with a third child. But last week the Hewitts' prudent planning turned sour when they received a letter from HSBC Bank, pointing out that their six-year-old endowment had a shortfall of £72,000 and would repay just over half their mortgage.

The news was not completely unexpected, says Mr Hewitt. "My wife's an accountant and we have seen the poor performances of other policies over the past two years. What really irks is the irresponsibility of the lenders, who jumped on the bandwagon, without either the investments or growth funds to back up their policies."

The Hewitts sought advice from Executive Mortgages and Brokers (EMB). Stephen Catto of EMB says: "We will use a small part of the Hewitt's mortgage to buy them alternative life cover, probably selling the endowment and taking out a low-cost IFA to pay off the mortgage. Even if they keep part of their endowment, it is unlikely to yield much when the Hewitt's mortgage ends in 19 years' time."

Around 6.6 million UK endowment holders face shortfalls similar to the Hewitts. Though some brokers advise selling poor-yielding policies, others recommend holding on to avoid high exit penalties. Dave Smith of HJP Financial Services has a different take: "Anyone who took out an endowment when interest rates were high is now hundreds of pounds a month better off due to low interest rates. If you keep your endowment and use part of that extra cash to increase your premiums and pay off your mortgage early, you may well avoid a shortfall."

David Hollingworth, of London and Country Mortgages, says large families may prefer to adopt a low-risk approach, keeping their endowment and life cover and taking out a repayment mortgage to cover any possible shortfall at the end of their term.

In general, older endowments tend to have lower shortfalls. But Janet Morris, 54, an office administrator in Bath, who took out her policy 22 years ago, has been told it could be as much as £11,000 below its £32,000 target at the end of her term in eight years' time. "It was a real shock. I was told I would have plenty of extra cash for holidays and other luxuries after my house was paid for, but the situation seems to grow worse by the week." Her solution is to keep the endowment and take out a low-interest discount mortgage to pay off the deficit.

Another option for shortfall sufferers is to pay their endowment up - or stop paying the monthly premiums. The policy will still mature on its set date and pay out any bonuses on money that has been invested. Otherwise you could sell your policy to a traded endowment policy (TEP) company which will sell it on to another investor.

Douglas Conn, of the London TEP 1stpolicy, says: "The average policy sold on the market achieves 9 to 12 per cent more than its surrender value, as its set-up costs have already been paid. We usually advise homeowners to speak to an adviser or broker before selling, especially if they have large future priorities such as school fees or a family wedding to pay for. We may have sold thousands of policies, but we always suggest people come to us as a last resort because they will lose out on any potential bonuses they may gain by keeping them on."

If you bought your policy after 1988, when insurers were pledged to keep records of transactions, you can claim mis-selling compensation. London IFA Lancaster Yorke has dealt with more than 50 claims in the past four months, reinvesting the "winnings" in its clients' endowment funds. "Whenever a policy-holder contacts us, we give them a letter and a booklet spelling out their options. They either go away and sort it out themselves or ask us to negotiate on their behalf," says Lancaster Yorke's Derek Neerkin.

Not all endowments falter, however. "If your funds have been efficiently run and produced high levels of growth, they may well pay off your mortgage and give you extra spending cash as well. Most problems have been caused by advisers giving their clients all the pluses but failing to mention the minuses and then selling them as a cheaper alternative to a repayment mortgage," says Neerkin.

Lancaster Yorke: 020-7405 7005 or lancasteryorke@hotmail.com

1stpolicy: 020-8455 1111 or email teps@1stpolicy.co.uk

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