Suitability of endowments and alternatives

The Money Advice Service argues if your client took out an endowment policy in the 1980s or 1990s to repay your interest-only mortgage but they are facing a shortfall it is important to take action now.

The service states the longer your client delays, the higher the cost of making up the shortfall.

Ian Naismith, senior manager of Scottish Widows, says assessing whether a mortgage endowment can deliver what your client needs will depend on: the client’s attitude to risk; the level of investment return needed for the mortgage to be repaid; and the investments under the policy.

The cost can then be compared with a repayment mortgage, adding together the insurance policy premium and the interest on the mortgage, Mr Naismith says.

He adds to make sure mortgage endowments deliver yearly reviews of these products are highly desirable.

If a mortgage endowment is set for a shortfall, Mr Naismith says the client should consider either moving to a repayment basis for all or part of the mortgage or starting alternative savings to make up the shortfall. He says it may also be possible to extend the term of the mortgage.

If a mortgage endowment does not seem the right way to go, the main alternative is a repayment mortgage.

Mr Naismith says it would also be possible to use an Isa in a similar way to a mortgage endowment (though it will not have the built-in life cover). It may also be possible to use the tax-free lump sum from a pension.

Paul Turnbull, actuarial and capital director of Aviva, says the following options should also be considered as an alternative to relying on a mortgage endowment:

1) Change the mortgage loan. Customers can switch all or part of the loan to a repayment mortgage, or repay the loan early. If they want to take the lowest risk approach, Mr Turnbull says they should consider speaking to their mortgage lender.

2) Take into account any other savings. These may be other endowments, investments or regular savings to pay off part of the mortgage loan.

3) Start an additional savings plan, to cover the expected shortfall.

4) Vary the endowment policy. Mr Turnbull says customers may be able to change their premium or life cover amount to make sure the policy still meets their mortgage repayment and projection needs.

The Money Advice Service points out a more drastic solution would be to sell your property and buy a smaller one to release funds to cover the shortfall. The service states this is a last resort for many people and adds there are no guarantees that if your client does sell their home they will find a cheaper property that they want to live in.

Finally, if your client is now aged 55-years-old or more, the Money Advice Service states they could consider an equity release scheme, such as a lifetime mortgage or home reversion plan.

But the Money Advice Service states equity release consists of “complex products”.

While enabling your client to release equity tied up in their home at the same time as continuing to live in it, the Money Advice Service warns equity release could affect the amount they leave in any inheritance.

If going down the equity release route, the Money Advice Service states it is essential your client takes independent financial and legal advice before making any decision.