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Guide to Mortgage Endowments and Interest-Only

    CPD
    Approx.50min

    Introduction

    That was until hopes of paying off your mortgage and having a nice lump sum on top were dashed by the regulator predicting at the end of the last century only half of these products would actually meet those expectations.

    In July 1999 the regulator established new projection rates for mortgage endowments of 4 per cent, 6 per cent and 8 per cent that providers had to use in illustrations for these products.

    The providers were then required to send each of mortgage endowment policyholder an individual projection letter based on these new rates - and to continue to update them every two years on the progress of the policy.

    Consumers receiving green letters were told their plans were “currently on track to repay the target amount when it matures”, because they only needed annual investment returns of 6 per cent.

    Recipients of amber letters required investment growth between 6 per cent and 8 per cent to repay the loan. They were told that “we consider it possible that your plan may not pay out enough”.

    Policyholders who received red letters were told that “we consider there is now a risk that your plan may not pay out enough... We therefore strongly suggest [that] you consider taking action”. Red letters meant the policy required investment growth greater than 8 per cent to avoid any shortfall.

    Back in 2004 the FSA estimated that across the industry 49 per cent of policies would be green, 37 per cent amber and 14 per cent red.

    By 2012 the now defunct FSA stated the mortgage endowment scandal had seen almost 2m complaints and more than £2.7bn paid out in compensation for mis-selling products.

    This guide will cover how mortgage endowments went from being popular to slammed, plus what the options are if your client is still stuck with this investment or if they have ditched their plan yet kept their interest-only home loan.

    Supporting material for this guide was provided by: the Money Advice Service; Ian Naismith, senior manager of Scottish Widows; and Paul Turnbull, actuarial and capital director of Aviva. Archive data from FTAdviser and Money Management surveys were also used.

    In this guide

    CPD
    Approx.50min

    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. How many interest-only mortgages are due to mature in 2020, according to 2012 figures from research firm Xit2?

    2. When did Nigel Lawson announce unmarried house buyers could no longer claim two sets of tax relief on mortgage interest up to £30,000 each?

    3. Who does not have grounds for complaint about their mortgage endowment, according to the Money Advice Service?

    4. What type of mortgage was pushed in huge volumes in the 1970s through into the 1990s alongside mortgage endowments?

    5. When did Legal & General fight in court against the FSA’s £1.1m fine for endowment mis-selling?

    6. What does Mr Turnbull says problems with endowments taken out in the 1980s and 1990s are often regarded as?

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