Making Sense of Endowment Policy for Mortgage

An endowment policy for mortgage can be a bit confusing, but essentially, it's a type of insurance policy that combines a savings element with a life insurance element.

In exchange for paying premiums, an endowment policy pays out a lump sum when you reach a certain age, typically between 65 and 75, or when you pass away.

This lump sum can be used to pay off your mortgage, providing you with a clear path to homeownership.

The policy's payout is usually tax-free, which can be a significant advantage over other savings options.

A mortgage is essentially a loan from a lender that allows you to buy a property. You borrow money from the lender to pay for the property, and you agree to make regular payments, known as mortgage payments, to repay the loan.

Mortgage payments typically include interest, which is the cost of borrowing the money. With an interest-only mortgage, you're only making payments on the interest, not the actual loan amount.

You'll need to have another way to pay off the loan balance, which is where an endowment policy comes in. This type of policy is essentially a savings plan that you invest in, and it can help you pay off your mortgage.

Endowment policies can take two forms: 'with-profits' and 'unit-linked'.

If you're considering an endowment policy for your mortgage, you should know that there are time limits to be aware of when claiming compensation for mis-sold endowments. You have six years from the date your policy was sold, or three years from the date you realised you had cause for complaint.

You may be able to pay off your mortgage early or enjoy a lump sum at the end of the repayment period if the investment growth rate exceeds those estimated at outset. This can be a great advantage of an endowment policy.

Your adviser didn't properly explain the risk that your policy could leave you with a mortgage shortfall at the end of its term if you received the advice after 28 August 1988. This is a key thing to watch out for.

The life insurance cover can be cheaper than if purchased on its own, making it a cost-effective option. This is one of the pros of an endowment policy.

You could be eligible for FSCS compensation if your endowment policy was mis-sold and you lost money as a result. This is a potential benefit of an endowment policy.

If your endowment policy was linked to a mortgage and you received advice after 28 August 1988, you may be able to claim compensation. This is a specific scenario to be aware of.

Here are some scenarios where you may be able to claim compensation for mis-sold endowments:

Endowment policies for mortgage were once a popular way to clear your mortgage debt, but it's essential to understand how they work and the potential risks involved.

In the 80s and 90s, endowment policy mortgages were extremely popular, with many people thinking they were a good way to clear their mortgage debt and have some extra cash for other things.

The customer pays only the interest on the capital borrowed with an endowment mortgage, reducing monthly payments compared to an ordinary repayment loan. This can be beneficial for those on a tight budget.

Up to 1984, qualifying insurance contracts, including endowment policies, received tax relief on premiums, known as life assurance premium relief (LAPR). This gave a tax advantage for endowment mortgages over repayment mortgages.

However, tax relief was ended in the March 1984 budget, and the tax relief on mortgage interest was reduced by the introduction of MIRAS (mortgage interest relief at source) the previous year.

If you think you were mis-sold your endowment policy and it was linked to a mortgage, you could be eligible for FSCS compensation.

You must have lost money as a result and must have received the advice after 28 August 1988.

Here are some reasons why you might be eligible for compensation:

There are time limits to be aware of when you’re claiming compensation for mis-sold endowments. You either have six years from the date your policy was sold, or if this gives you more time, three years from the date you realised (or should reasonably have realised) that you had cause for complaint.

If you're considering using an endowment policy to pay off your mortgage, there are some things to keep in mind.

You could be eligible for FSCS compensation if you think you were mis-sold your endowment policy and it was linked to a mortgage. You must have lost money as a result and must have received the advice after 28 August 1988.

There are specific circumstances that might make you eligible for compensation, including if your adviser didn't properly explain the risks of an endowment policy, or if you already had an endowment and were advised to surrender it and take out a new one.

You have six years from the date your policy was sold to claim compensation, or three years from the date you realised (or should reasonably have realised) that you had cause for complaint, whichever gives you more time.

If you're thinking of cashing in your endowment to pay off your mortgage, consider whether you need the life insurance it provides. If you do, you might want to explore making the endowment paid up, which means you stop paying monthly premiums but wait until the end of the term to get the lump sum.

Cashing in an endowment can be a good idea if you can use the money to overpay on your repayment mortgage and reduce its term. For example, if you're paying £200 a month for your endowment and £110 of that is going towards the endowment itself, you could use the remaining £90 to overpay on your mortgage.

Here are some key things to consider before cashing in your endowment:

Endowment mortgages were extremely popular in the 80s and 90s, but they had some major flaws.

The anticipated growth rate for endowments policies was high (7-12% per annum) in the 80s, but by the middle of the 1990s, the change in the economy made these assumptions look optimistic.

The Treasury began to reduce MIRAS (mortgage interest relief at source) in the 1990s, which worked in favor of interest-only mortgages, but endowment mortgages continued to grow.

Regulation of investment advice led to a reduction in anticipated growth rates down to 7.5% and eventually as low as 4% per annum.

By 2001, the sale of endowments to repay a mortgage was virtually seen as taboo.

Financial regulations introduced compulsory re-projection letters to show existing endowment holders what the likely maturity value of their endowment would be assuming standard growth rates.

To claim compensation for mis-sold endowments, you must have lost money as a result and must have received the advice after 28 August 1988.

You could be eligible for FSCS compensation if your adviser didn't properly explain the risk of a mortgage shortfall or if your endowment is due to pay out after your retirement age.

There are time limits to be aware of when claiming compensation for mis-sold endowments:

In many cases, courts have found against the insurer or broker responsible for the original advice and have required them to restore their customers to the financial position they would have been in had they taken out a repayment mortgage instead.

As of July 2006, UK banks and insurance providers have paid out approximately £2.2 billion in compensation for mis-sold endowments.

You have a couple of options regarding your current endowment mortgage.

You can increase your payments, which your provider is most likely to recommend.

Alternatively, you can cash it in by ceasing payments and taking whatever value for it you can get from the mortgage lender. This will give you the cash you need, but you'll be forgoing the life insurance component of the policy.

If you decide to sell the endowment policy mortgage, get several quotes first to ensure you get the best deal. You'll also need to consider the cost of taking out a new life insurance cover for yourself.

You could also talk to your lender about making it paid up, which means they'll allow the policy to continue with no further payments until the maturity date. This will affect the final value of your property.

Here are some mortgage options to consider:

You can also consider remortgaging to secure a better deal, and you may find that it doesn't cost you anymore.

If you think you were mis-sold your endowment policy and it was linked to a mortgage, you could be eligible for FSCS compensation. You must have lost money as a result and must have received the advice after 28 August 1988.

Your adviser didn’t properly explain the risk that your policy could leave you with a mortgage shortfall at the end of its term. This is a common issue with endowment policies linked to mortgages.

You have two options to claim compensation: six years from the date your policy was sold, or three years from the date you realised you had cause for complaint. The latter gives you more time if you're not aware of your situation right away.

If you're claiming compensation, make sure you meet the criteria. You can claim if your endowment is due to pay out after your retirement age and it was clear at the time the advice was given that you wouldn’t be able to carry on paying premiums after your stated retirement age.