Wealth Check: 'What should I do with my endowment home loan?'
Each week we give 'Independent on Sunday' readers a financial makeover
Sunday 29 August 2004
Ed Webb needs to make up his mind about his mortgage. Five years ago he bought a flat in Peckham Rye, south-east London, taking out a £75,000 interest-only mortgage. The property is now worth £250,000.
He pays £308 to his lender every month and a further £138 into a Norwich Union unit-linked endowment. He has recently remortgaged from Birmingham Midshires to the Halifax, where he is now on a two-year discounted stepped tracker loan. He pays 4.9 per cent interest in the first year and 5.15 per cent in the second. But despite the changes in his arrangements, he still has the hangover of his endowment.
"I'm not sure whether to carry on as I am with the policy, or sell it and get a repayment mortgage, or to keep the policy and use it for savings."
The endowment does provide critical illness cover that would pay out if he were unable to work. But he adds: "I'm not sure if this is good value for money. I was younger when I took it out and didn't really think about what I would need."
He is keen on the idea of investing in property and would consider a buy-to-let flat in a couple of years.
His other investments are stock market individual savings accounts (ISAs). He has £2,000 in the Newton Higher Income fund, £750 in Schroders Medical Discovery and £500 in Henderson TR European Growth.
He also has £3,000 in a Cahoot online savings account, where he earns 5.5 per cent gross.
He has paid 7 per cent of his earnings into a teacher's final salary pension scheme for three and a half out of the past five years, and is considering whether to make up this 18-month deficit by purchasing "extra years".
"I've been offered the chance to 'make up' these months by paying either a lump sum or spreading it across my salary," he says. "I've been told that if I buy the extra final salary years now at the part-time salary I'm on, it will cost me less than it would if the job turned into a full-time post later on.
"Should I do this, considering that I haven't made any other voluntary contributions to my pension fund?"
Ed Webb, 32, from south-east London
Job: teacher. Income: £23,000 part-time. Savings: £3,000 in an online bank account. Investments: £3,250 in three stocks and shares ISAs. Goal: to work out what to do with his endowment mortgage and get more from his savings and investments.
The endowment conundrum is simpler than Mr Webb might think, says Kevin Anderson of independent financial adviser (IFA) Budge & Co. "Ed should treat it as a savings plan since he won't be able to sell it; there's no market for [unit-linked] endowments."
But his mixed bag of ISAs could do with a shake-up, suggests Philippa Gee at IFA Torquil Clark.
The extra pension years on offer should be snapped up, advises Julian Griffiths of IFA Towry Law.
Switching to a repayment mortgage would help Mr Webb to chip away at the capital he owes rather than just paying the interest, says Ms Gee. It would cost an extra £200 a month, she estimates, but would leave him the option of keeping his endowment as a savings plan for retirement.
Alternatively, by swapping to a repayment deal and extending his mortgage term by five years, he could reduce this extra monthly cost to £140.
Investing in a buy-to-let property - even if this plan is some way off - should remain low on his list of priorities, Ms Gee adds.
"It could be wrong to concentrate on property, leaving only small [amounts] of other investments."
Mr Webb should build up cash savings instead and, when the time might be more suited to buy-to-let investments, use them for a deposit.
Both Mr Griffiths and Mr Anderson advise Mr Webb to switch his £3,000 Cahoot savings into a mini cash ISA to benefit from tax-free growth.
Another strategy, Ms Gee suggests, would be to leave the money in the competitive Cahoot account but channel new savings into a mini cash ISA each month. Abbey's postal account offers 5.35 per cent (from this Wednesday) and guarantees to be at least 0.5 per cent above the Bank of England base rate until next April, she adds.
Mr Webb should stick with the Newton Higher Income fund, our IFAs say, but opinion is divided over the two other stock market investments.
Mr Griffiths and Ms Gee point out that Schroders Medical Discovery is a high-risk specialist fund - one that the latter feels is "too great a level of risk for Mr Webb".
For more diversity to balance the Newton fund's UK bias, Ms Gee suggests Jupiter Global Opportunities or Fidelity Wealthbuilder.
Alternatively, Mr Webb could keep all three but put new money only into the Newton fund, says Mr Anderson.
"Buying" 19 months' worth of pension contributions is "an excellent idea" to boost your income for old age, says Mr Anderson.
It will be cheaper to buy the added years now while Mr Webb is working part-time, says Mr Anderson, and probably better value to do so via a lump sum instead of an extra payment each month.
However, he should be aware that the final salary pension benefit he ultimately receives from buying these added years will reflect his part-time salary (£23,000) instead of the full-time pro rata one (£33,000).
Mr Webb's endowment provides both life cover for the mortgage and critical illness cover, so if he did cash it in, he would need to get replacement insurance, says Ms Gee.
If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email firstname.lastname@example.org
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