Borrowers warm to terms of endowment: Policyholders may be entitled to low-cost loans for small amounts

ONE OF the cheapest ways to borrow small amounts of money is to raise a loan against an endowment policy. A number of companies offering these deals are now cutting interest rates.

The loans are not common with endowments taken out to back mortgages, but they are offered against savings policies. They are widely available to holders of with-profit policies but difficult to come by on unit-linked contracts because the surrender values, and thus the insurer's security, can fluctuate wildly.

Equitable Life is cutting its endowment loan rate from 11 per cent to 9 per cent. The insurer was prodded by an Independent reader, Walter Coughlin, who has a pounds 6,000 loan secured against a series of Equitable policies.

Mr Coughlin has not enjoyed a similar response from Refuge Assurance, where his wife has a loan for about pounds 5,000. They have asked for a rate cut but the charge remains at 13 per cent.

John Cudworth, chief executive of Refuge, said it was expensive for the company to provide small loans. 'We don't enjoy lending money in small amounts,' he said. 'This is a service to policyholders. If they choose not to like the service, they are welcome to go elsewhere.'

Mr Cudworth did not rule out a rate cut. 'Things change in this market so fast that anything can happen,' he said.

Scottish Amicable, which lends against with-profit policies, dropped its endowment loan rate from 11 per cent to 9 per cent on Tuesday. 'We tend to be reasonably related to base rate,' said Bill Robertson, product marketing manager. 'Once it became clear interest rates were going to stay down, we moved the rate.'

Many investors in endowment policies will not realise that they can borrow from the insurance company, with the loan secured on the value of the policy. Prudential Corporation has 36,000 policy loans on its books, but more than 2 million policies are eligible.

The usual arrangement with these loans is that the borrower pays interest annually but does not repay capital on a regular basis. They can pay off the loan in lump sums or have the whole lot deducted from the proceeds of the policy when it matures.

Insurers usually lend a maximum of 80 or 90 per cent of the policy's surrender value. Since this value will not be high in the early years, many policyholders will only be able to borrow small sums.

But with banks and building societies still charging 20 per cent or more on unsecured personal loans, the endowment option may still be attractive. Policyholders will usually do better by raising a loan than surrendering their investments.

Companies do not make huge efforts to promote the loans. Richard Anscombe, financial planning manager at the Prudential, said borrowing becomes a a possibility when it is asked to give quotations for surrender values on a policy.

But the Prudential does not advertise the lending facility. 'We are supposed to promote the policies as long-term investments, not short-term ones,' said Mr Anscombe.

The Prudential will lend sums of pounds 250 upwards, for a minimum of six months, against with-profit endowment policies and whole-of-life policies.

'The maximum we lend on an endowment policy is 90 per cent of the surrender value, and on a whole-of-life policy, 80 per cent of the surrender value,' explained Mr Anscombe.

He said the Prudential had charged 13 per cent on its loans since 1984. The rate is linked to the yields it would be obtaining on medium-dated gilts if it was investing the money.

Medium-dated gilt yields have come down to around 9 per cent and the Prudential is now considering cutting its rate to the same figure.

Some policyholders may find that their banks are willing to lend against the security of endowment policies. Royal Bank of Scotland said: 'This is not something we do often. I don't think we even have a leaflet on it. But it can be a useful facility in certain circumstances. The rate would be agreed between the customer and the manager.'

Barclays said it would consider endowments as security for loans, but usually it cost the bank pounds 60 to register a legal charge, so the costs of setting up the loan would be high.

All the insurers we spoke to said there would be no set-up charges on their loans.

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