Catching up with your endowment shortfall
If your endowment policy is not likely to repay the whole of your mortgage, you could be left with a large shortfall to pay. There are a number of options set out below that can help you catch up on the shortfall.
It is important that you act quickly but before choosing which option to take you should first :
- check your mortgage agreement to see whether you would have to pay any fees if you wanted to make changes to your mortgage (these fees could be very expensive),
- check whether you can make a complaint if you think you were given bad advice when you were sold the endowment,
- get advice from an independent financial adviser. Visit unbiased to find an adviser near you. The Financial Conduct Authority website allows you to check whether your adviser is registered with the Financial Services Register.
Increasing your payments
Pay more into the endowment
You may choose to keep your existing endowment policy, but pay more into it to make up the shortfall. Be aware that if you are in a high tax band, you may have to pay more tax if you do this.
Paying a lump sum
When interest rates fall, the amount you pay to your lender usually falls as well. You may be able to use the money you save to make a lump sum payment towards the capital. Always check first whether you will have to pay redemption fees for paying off part of the capital you borrowed early.
Taking out a separate investment
You may want to keep your endowment policy and take out a separate investment to cover the shortfall. Many people choose an individual savings account (ISA) to do this. Some ISAs are linked to the stock market, and others aren’t. You should think about whether you are prepared to take the risks involved before you choose.
It might be possible to negotiate a restructure of the loan to extend the mortgage term to give more time to build up investments or switch to capital repayments.
Some banks and building societies have maximum ages for borrowing so if you are over 65 you might experience some difficulty getting a lender to agree to this. Some lenders are however beginning to review these policies. Using a mortgage broker can help because they can navigate the market and negotiate with these more flexible lenders.
Switch the shortfall part of the mortgage to a repayment mortgage
You may be able to keep your existing endowment going at its current level, and convert the predicted shortfall to a repayment mortgage. If you do this, part of the capital you borrowed would be paid off during the remaining term, and your endowment policy would pay off the rest at the end of your mortgage. Ask your lender whether this is possible, and how much it would cost.
Switching the whole of your mortgage to a repayment mortgage
You may decide that you are not happy with the risks involved, and choose to take out a repayment mortgage. You can do this through your existing lender, or by switching to a new one. You can keep your endowment policy going if you want to, which would give you a much bigger lump sum than if you sell your policy or cash it in early. If you don’t want to keep your policy going, you may have to take out separate life insurance, which could be expensive and may be difficult if you are older or have health problems.
Selling or cashing your endowment in early
If you’ve been paying into the endowment policy for at least two years, it may have a surrender value. This is the amount you will get if you end the policy. However, you won’t get as much as if you continue to pay into the policy until it matures, and could even get less than you have paid in. This is because you pay most of the fees and expenses involved at the beginning of the policy. The longer you keep it, the more it will earn.
If you have been paying into your policy for at least five years but don’t want to keep it going, you may get more money for it if you sell it rather than cash it in. Get advice from an independent financial adviser before you decide.
Equity release plans allow you to access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
You could choose to use the money to clear any mortgage shortfall.
Equity release could be a good option if you want some extra money and don’t want to move house, but be aware of the following :
- you might not be able to rely on your property for money you need later in your retirement. For example, if you need to pay for long-term care
- if you decide you want to downsize later on you might not have enough equity in your home to do this
- any money you receive from equity release might affect your entitlement to state benefits
- you will have to pay arrangement fees, which can reach £1,500-£3,000 in total, depending on the equity release plan being arranged
- it is likely that there will be less for you to pass on to your family as an inheritance.
Get advice from an independent financial adviser if you are thinking of taking out an equity release plan. All advisers recommending equity release must be a member of the Equity Release Council member directory.
You might be able to raise extra cash by selling your home and moving somewhere smaller and more manageable.
If you have children who have now left home and have empty bedrooms, this might be a sensible option.
Downsizing works best if you own a pricey property and relocate to a more affordable region.
Use your pension
If you are over 55, you might be able to dip into any pension fund you hold to repay the endowment shortfall.
Bear in mind that pension money must last as long as you do, so this should only be done as a last resort and after getting advice from an independent financial adviser.