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

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The Independent Online
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.