During the 1980s and 1990s, thousands of people took out their mortgage on an interest-only basis, hoping to use an endowment plan to pay off the mortgage at the end of the term.
At the time, investment returns were high and many investors were advised that on maturity, the endowment might even provide them with surplus capital after the mortgage had been paid off.
Of course, what this meant in real terms was that unrealistically high rates of investment return were assumed when calculating premium levels and, as these assumed rates of return have not been achieved, then not only has there not been any surplus capital, but in many cases the maturity value of the endowment has not even been sufficient to pay off the outstanding mortgage.
Unsurprisingly, many investors have been left disappointed and in more serious cases, have had extend the term of their mortgage or use other assets to pay off the shortfall.
Insurance companies have been advising their investors over recent years of the likelihood of their endowment meeting its target and in very many cases, endowments have underperformed, leaving many investors disappointed and frustrated. However, given sufficient time and notice, there are a number of options that you can take which should, at least, help to cushion the blow of an underperforming endowment:-
• Increase your contributions – probably not an ideal solution for those already disappointed and frustrated with the performance of their endowment.
• Effect an additional investment – such as an ISA or unit trust with the aim of providing additional funds when the mortgage term ends.
• Consider using the tax free cash sum from your pension – of course, this has certain disadvantages – for example, potentially reducing your income in retirement.
• Reviewing your investment fund choice – switching the accumulated fund or future contributions in an attempt to improve investment performance.
• Switch all or part of your mortgage to “capital repayment”.
It is important that all of these options are considered in conjunction with a financial adviser who will be able to help you decide the most appropriate option for your circumstances. For example, if its decided that converting your mortgage to capital repayment is the way forward, your adviser will also be able to tell you what to do with your endowment which will no longer be required. This could be surrendering it back to the insurance company or in many cases it is possible to achieve a higher figure by selling endowments policies on the second-hand market.
And, of course, the proceeds from your endowment could be used immediately to reduce your mortgage. In addition, as you will no longer have the life cover provided by the endowment, your adviser will be able to recommend the most appropriate replacement life cover for you.
So, if you have any doubts as to whether your endowment will reach its target, speak to an adviser or click on the link below.
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