Money Q & A: How do I escape from the endowment trap?

In 1990 I took out a 20-year endowment policy to cover a pounds 38,000 mortgage. By 1995 I had married and my husband and I took out a 25-year endowment to cover a new pounds 60,000 mortgage. Everything we read advises against endowment mortgages and we certainly wish we had not taken out a second endowment mortgage. Should we stick with our endowment policies to the bitter end? Can we improve our situation? We are likely to need a larger property, but also expect our income to decline.

JB, Leicestershire

It is fair to say that much impartial opinion believes endowment mortgages are a bad thing. A Labour MP recently called for them to be banned, claiming that they have been mis-sold to many home buyers. The main argument against using endowment policies to pay off mortgages is that they can be expensive and inflexible. They represent a long-term commitment that only a minority of home owners keep. Home buyers who prefer to pay off a mortgage using an investment vehicle would do better to consider a tax-efficient ISA account. Those who want a mortgage covered by life insurance can get separate and relatively cheap "term" insurance with no investment element.

An even more serious problem has slowly been coming to light in recent years. Some endowment policy holders have been set monthly premiums that now look too low. Some insurance companies have advised policy holders to increase premiums mid-term if they want to ensure that the proceeds on maturity will be sufficient to pay off the outstanding mortgage. Unfortunately, it is one thing to counsel against taking out an endowment policy, but another to advise stopping an endowment mortgage once started. If you want peace of mind that your mortgage will be paid off by the due date, consider converting it to a repayment mortgage. If that is too expensive, you could at least consider starting to pay off some of the capital each month while you can afford it. The more you pay off, the less interest you will pay over the remaining term of the mortgage. But you must first check whether any capital repayments, even small ones, carry a penalty.

If you do switch to a repayment mortgage you should normally carry on paying the endowment policy premiums until the maturity date of the policy in order to get full value for all the premiums paid to date. Your endowment policy would then represent a savings plan to give you a lump sum pay- out at some date in the future to spend as you wish. However, if you have had an endowment policy for only a few years or so you could consider cutting your losses. You are unlikely to get much back for premiums paid to date and may get nothing at all. But you may prefer to spend the money saved on endowment premiums on converting to a repayment mortgage and, if you can afford it, into more tax-efficient savings vehicles such as an ISA or a pension plan.

It is not clear from your letter whether your second endowment policy mortgage is intended to cover the full pounds 60,000 of your mortgage or just pounds 22,000 - that is, the extra mortgage on top of your original loan of pounds 38,000. If the second policy covers the full pounds 60,000 you may have been mis-sold this policy since you needed a policy to cover only pounds 22,000. In this case, you should make a formal complaint and take it through the full complaints procedures.

You may decide to stick with your endowment mortgage to the bitter end. But if you do move in future and need a bigger mortgage, you can arrange to repay the first pounds 60,000 covered by endowment policies on an interest- only basis and the extra part of the mortgage on a capital repayment basis. You won't have to take a further endowment policy. Don't believe any lender or adviser who says otherwise.

Now he's 64

My father will be 65 next February and should be entitled to higher tax allowances. Will he still be entitled to the higher married couple's allowance or has the change in the last Budget permanently deprived him of this tax perk?

AM, Bedfordshire

Older people qualify for higher tax allowances in the tax year in which they reach their 65th birthday and even higher allowances in the tax year in which they reach 75. Higher age-related allowances are steadily withdrawn once your total income goes above a certain limit, pounds 16,800 at present.

Depending on your father's total income, he should already be receiving higher allowances for the whole of the tax year if his 65th birthday falls next February. (The 1999-2000 tax year runs from 6 April 1999 to 5 April 2000.) He can put in a claim now. Those coming up to their 65th birthday cannot assume that their tax office is aware of their date of birth.

Those whose 65th birthday falls in the 2000-1 tax year should inform their tax office in the next few months so that they pay the correct amount of tax from next April.

The change announced in this year's Budget withdraws the married couple's allowance from everyone born after 5 April 1935 from next April. But couples in which either husband or wife were born by this date will continue to be able to claim the married couple's allowance, including the higher age-related part of the allowance if the income of the husband does not exceed the total income limit.

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Business Development Executive - Affiliates & Partnerships

£20000 - £35000 per annum: Recruitment Genius: This multi-award winning foreig...

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor