Is Your Endowment A Letdown?
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Although mortgage endowments have fallen out of favour, millions of British homeowners still have mortgages backed by these failing policies.
For the record, endowments were the product for financial salespeople for almost two decades. From the late Seventies until the mid-Nineties, tens of millions of endowments were sold to homebuyers and savers. The firms flogging these policies promoted them using three key messages:
- A mortgage endowment includes life insurance to pay off your home loan if you die during the life of the policy, typically 25 years.
- An endowment includes an investment element, the aim of which is to build up a pot large enough to pay off your loan when the policy matures.
- The payout from a maturing mortgage endowment is free of income tax and capital gains tax.
These endowments sound pretty tasty, don't they? Indeed, thanks to high investment returns, endowment policies maturing in the Eighties and Nineties produced bumper payouts. What's more, most paid off the entire mortgage and left a tax-free lump sum for their owners.
Unfortunately, endowments had three flaws which only really came to light when the stock market plummeted at the turn of the century:
- Mortgage endowments had astonishingly high charges, which could slash yearly investment returns by 5%+. Ouch!
- One reason why endowments had such high charges is that they paid lip-smacking commissions to financial salespeople. Indeed, for selling a single endowment, the upfront commission could run to thousands of pounds -- money skimmed directly from the buyer's fund.
- Most endowment policies were 'with profits' plans that invested in a range of different assets, such as shares, property, bonds and cash. However, much of this capital was invested in shares, which took a dive in the aftermath of the dotcom boom and bust.
The vast majority of mortgage endowments were sold by household names such as Legal & General, Norwich Union, Prudential, Royal & SunAlliance, and Standard Life. Thus, buyers put their trust in these brands, with up to six out of seven (83%) homebuyers choosing an endowment mortgage.
Alas, it's estimated that three in five (60%) of all endowments were mis-sold, leading to Britain's biggest-ever financial scandal. As I warned four years ago in The £37-Billion Mortgage Time Bomb, four out of five mortgage endowments won't come up with the goods. Indeed, the total shortfall from these failing plans could be as high as £50 billion.
Eventually, this problem became so great that it attracted the attention of City watchdog the Financial Services Authority (FSA). The FSA took action to crack down on the widespread mis-selling of endowments. It forced financial firms to clean up their acts by improving their selling processes and record keeping. Also, it fined the worst offenders millions of pounds, which battered their reputations.
What can you do today?
If your endowment is underperforming then it's unlikely to produce a big enough payout to clear your mortgage. In this case, you've probably received an 'amber' or 'red' warning letter from your life insurer. Thus, you need to take action now to reduce this shortfall before it's too late. Your options include:
1. Make a mis-selling complaint to the provider. If you are unhappy with the way that your policy was sold to you, make a formal complaint in writing. Initially, this should be addressed to the adviser who sold you the policy or the endowment provider itself.
For more information on making a complaint, see One Letter Could Win You Thousands. If your grievance is rejected, then you can lodge a complaint with the Financial Ombudsman Service (FOS). The FOS is fully aware of the scale of the endowment scandal, which explains why more than half of its decisions go in favour of the consumer.
2. Start paying off your mortgage. By switching from an interest-only mortgage to a repayment mortgage, you can start making a dent in your outstanding debt. Alternatively, you can make extra one-off repayments or increase your monthly mortgage repayments. Before taking these steps, check with your lender to see if any penalties or charges apply.
3. Set up a replacement savings plan. By saving in a safe, secure, tax-free savings account known as a cash ISA, you can build up a lump sum to help reduce your shortfall. However, given that savings rates are usually lower than mortgage rates, this may not be as attractive as option 2.
4. Sell or auction your endowment. If you cash in your endowment by surrendering it to the provider, you will be penalised for pulling out early. Therefore, you'll do much better by selling your policy via an endowment-trading firm or auctioneer. You'll find a list of these businesses in Ditching Dodgy Endowments.
5. Top-up your existing policy. No, no, no, no, no! If you've been let down by a company, why give it more money or buy another of its ropey policies? You'd end up being mugged twice by the same firm!
By the way, don't think for one second that the endowment scandal is over. Given that most mortgage endowments run for 25 years, they could be leaving homeowners short well into the 2020s. So, if you're worried about your mortgage endowment, don't delay: act today!
Finally, don't give up hope if you still have enough time to complain. With my help, my wife wrote one letter to our endowment provider, making a formal mis-selling complaint. Within seven weeks, it admitted liability and immediately paid us over £4,500 in compensation. Not bad for an hour's work, agreed?
More: Find a magnificent mortgage via the Fool | Homeowners Win Endowment Compensation | Three Terrible Mis-selling Cases
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