FOOL'S EYE VIEW
Endowment Woes

By Alan Oscroft
June 7, 2001

Liverpool -- My old mate Graham popped round this morning clutching a letter from the bank. It was from Barclays (LSE: BARC), and it was about the endowment that he has in place to pay off his mortgage. Here's what it said:

"We consider it possible that your plan may not pay out enough. To repay the target amount when it reaches the target date, it needs future investment growth to be towards the top end of the current projection rates set by the independent regulator. In view of this you may wish to think about taking action."

That's an amber letter according to standards agreed with the FSA, by the way. See here for more details.

Re-Projections

There will be a good few letters like this dropping through letterboxes in the coming weeks and months as endowment sellers are now obliged by the FSA to send you a "re-projection letter" at least every two years.

Endowments in general are falling behind the kind of projected returns that were suggested to many borrowers when they first took out their mortgages, and so a lot of these letters are likely to suggest you think about taking action.

Performance Projections

The projected performance of Graham's endowment makes for interesting reading. If future returns average 6%, he should expect a shortfall of just £100, which is no real problem at all. But if they come in nearer 4% he could be short by over £5,000. Fortunately for him, he has a relatively small mortgage. Those with more substantial amounts to repay could end up with a significantly bigger shortfall if that 6% fails to materialise. But fear not, because it isn't as bad is it sounds.

The reason endowment projections have been lowered is because we are now in a period of lower interest rates and lower expected future returns from stock market investments (in the short term, anyway). But at the same time, that means you'll be paying less each month in mortgage interest. Swings and roundabouts and all that.

What Should You Do?

Probably the best way to keep your mortgage in line with those initial projections is to keep making the same overall payments as when you started. If you pay less in interest each month, put the money saved towards paying off the capital rather than behind the bar at your local.

There are several ways to do that and the best way for you depends on your individual circumstances, but here's what my mate Graham is going to do:

Nothing.

Not yet anyway, because there's no rush. He's going to wait for his next mortgage statement and then investigate whether converting part of his mortgage to a repayment mortgage would make sense.

Some alternatives are:

1) Use the money saved in interest to increase your monthly endowment contributions.

2) Spend it and extend the term of your mortgage instead.

3) Invest the money (in, say, an index tracker) to generate an additional lump sum.

4) Dump the endowment altogether.

5) Turn the mortgage into a repayment mortgage.

6) Make the endowment "paid up" (ie, stop contributing) and revisit options 1 to 6.

More

* For more information on mortgages, including endowments, head for the Fool's Homeowning centre.

* For the latest from the Financial Services Authority (the FSA), head for their web site, where you can download some very useful guides. The October 2000 Progress Report on Mortgage Endowments can be found here.