Stay in for 25 years, or lose out
Sunday 02 November 1997
The bulk of the monthly payment - perhaps pounds 400 out of pounds 460, for instance - covers interest on the loan, and the rest of the payment goes into the life policy whose premiums are invested in securities and equities. To achieve full repayment and, if possible, leave the borrower with a lump sum as well - as most endowments are said to do - this investment has to produce average returns higher throughout the period than effective rates of mortgage interest.
How many people have endowment mortgages? Hard to tell, precisely. But from less than 20 per cent in the early 1980s, endowments peaked in 1988 at 84 per cent of gross mortgage advances of pounds 67bn, and three years ago, according to the Council of Mortgage Lenders, accounted for 60 per cent of mortgages worth pounds 57bn. Now, endowments declared as such have fallen to a third of all new mortgages, although their actual share may be a bit higher.
Three kinds of endowment are sold: traditional "low cost with-profits", which guarantee the medium-term bonuses reflecting investment performance, flatten peaks and troughs and are probably the safest and most popular; "unitised with-profits", which express benefits in terms of the policy's current aggregate value; and "unit-linked", whose returns mirror changes in the market value of the units in which the premiums are invested. In each category, policies and charges vary from company to company.
Best buys? Because many people move or split up "before term", those endowments that are "low charge and high surrender value" are best. These, said the OFT's 1995 report, could "out-perform straight repayments on most scenarios" and, towards maturity on a pounds 50,000, 25-year mortgage, cost pounds 3,200 less than some with "high charges and low surrender". Best companies? For with-profits in particular, Equitable Life, Friends Provident, General Accident, Legal & General, Norwich Union, Scottish Provident, Scottish Widows and Standard Life.
Any other pluses? Not many, it seems. On average, at early surrender a fifth of the way through, compared with straight repayments, the OFT found they would cost an extra pounds 600. For those with lower incomes and other borrowings, extra costs of even a few pounds a week can prove critical.
Endowments are also less tax-efficient than interest-only mortgages backed by PEPs or pensions, because life funds lost relief on premiums in 1984 and are subject to both income tax and capital gains. Cuts in Miras (Mortgage Interest Relief at Source) to 15 per cent beneath a pounds 30,000 ceiling have reduced any advantage bestowed on endowments by rebates on amounts fixed until maturity.
Lower inflation since the 1980s has meant that, as the value of sums borrowed has eroded less rapidly, there has been more pressure on borrowers to repay their debts quickly instead of taking out endowments and waiting for a lump sum after 25 years.
To make the most of endowments, that is what you need to do. Hence, although they are often sold on flexibility, they actually lock you in. In theory, if you sell, you can keep the life policy going on its own or transfer the mortgage to your next property. In practice, like the OFT, you may find this process less expensive with straight repayments. And if you have a joint endowment mortgage and are separating, one of you has to sign over your rights on the joint-life policy, or it has to be surrendered completely. If you want to keep your mortgage comparatively simple and certain, an endowment is probably not your answer.
- 1 'We're not heroes, just tourists': Swedish police officers on holiday stop vicious assault on New York subway
- 2 Black Mass trailer: Johnny Depp might have started making good films again
- 3 Jacob Lescenski and Anthony Martinez: Straight student asks gay friend to High School prom and makes a million Twitter friends
- 4 Buckingham Palace guard who attacked passers-by in 'most most violent piece of CCTV footage' police officer had seen walks free
- 5 Australian student Tommy Connolly, 23, adopts his pregnant, homeless 17-year-old cousin to give her a chance at 'a better life'
Top 20 misconceptions people believe are true
Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
'We're not heroes, just tourists': Swedish police officers on holiday stop vicious assault on New York subway
Head transplant: man will be attached to new body in under an hour and aim is immortality, doctor says
Buckingham Palace guard who attacked passers-by in 'most most violent piece of CCTV footage' police officer had seen walks free
The sickening truth about food banks that the Tories don't want you to know
Katie Hopkins on LBC: Listen to caller taking The Sun columnist to task over migrant comments
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...
£22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...