Norwich Union reckons a third of its endowment policies due to mature this year will fall short. It's just the tip of a rather nasty iceberg.
The Telegraph reported this weekend that as many as one in three of Norwich Union's endowment policies due to mature this year won't cover the associated mortgage debt. This will be the first year that the company's maturing endowments have come up short. Other companies are likely to have similar problems and in future years the situation is likely to get worse.
According to National Statistics, between 1980 and 1994, endowment mortgages accounted for around 60% of new mortgages while repayments made up around 35%. Prior to 1980, endowments accounted for less than half of new mortgages. So the 1980s was certainly the decade of the endowment and that means there are significant numbers due to mature over the next several years.
Thankfully, in the last couple of years, endowments have become much less popular. In fact, it is reckoned they accounted for just 10% of new mortgages. Repayment mortgages are back in vogue, making up 75% of new loans, while 11% of us went for a mixture of repayment and interest-only and 4% went for pension- or ISA-backed mortgage.
One of the main problems with endowments is that everyone was slow to appreciate the effect of falling interest rates in the late 1990s. That's probably because we were all too busy enjoying the lower monthly payments without realising that some of this money needed to be put aside to compensate for a low-inflation environment and an endowment likely to produce lower growth.
For example, say you have a £50,000 mortgage. At an interest rate of 10%, the monthly interest payments are £454 for a repayment mortgage and £416 for an interest-only. But if the interest rate falls to 5%, the repayment falls to £292 a month and the interest-only to £208. In this situation, your payments reduce by an additional £46 a month (or £550 a year) if you have an interest-only mortgage. Ideally, this money should be put aside to cover possible investment shortfalls, although of course not many of us are that organised or disciplined.
It's reckoned that the average policy yet to mature will come up several thousand pounds short. Everyone who has a policy needs to take action now because the earlier it's sorted, the less it will cost. A recent Consumers Association survey reckoned that 62% of people facing a shortfall hadn't yet done anything about it. Be a Fool and make sure you're one of the other 38%!
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