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 email@example.com
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Bargain Hunter: Now's your chance to watch the best movies free of charge at home
How much lower will mortgage rates go?
The FTSE 100 is inching closer to its record high but can it maintain these levels?
MPs call for Equitable Life policyholders to be paid £2.8bn owed by government
Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity
- 1 Scarlett Johansson new band 'already hit with legal complaint' from another The Singles
- 2 Husband and wife die holding hands within hours of each other after 67 years of marriage
- 3 What color is The Dress, white and gold or blue and black? An eyewitness gives a definitive answer
- 5 'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Oscars 2015: Birdman beats Boyhood as Eddie Redmayne and Patricia Arquette win big - as it happened
New theory could prove how life began and disprove God
Half of Ukip voters say they are prejudiced against people of other races
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
Aqsa Mahmood branded a 'disgrace' by her parents after claims she recruited three UK girls flying to Middle East
This is what it's like to be dead, according to a guy who died for a bit
iJobs Money & Business
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
£22,000 - £23,000: Beverley James: Are you looking for the opportunity to work...
Day In a Page
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
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads