Endowment policy and paying off Mortgage - Thoughts please.

[Kris]

Disclaimer - I fully accept that the best course of action is to seek advice from an IFA and any advice / thoughts given here are peoples own views, not financial Investment advice.

There seems to be quite a few financially savvy people on the forum i would be interested in your thoughts on what you would do in this situation.

We have a 25 year endowment mortgage taken out in 1998 which is due to end in 2023. To pay this off we took out an endowment policy back when we bought our first house which, despite the market challenges has done ok. This morning, I received the latest statement for the endowment policy which confirms there are currently sufficient funds in the policy to enable us to close it and pay off the mortgage now.

My intital thoughts were to close the endowment policy now and pay off the mortgage so that we own the house free and clear. This way we can use the money that would normally go to pay the mortgage interest and the endowment payments each month to invest elsewhere. This would save us approx £5K a year paying the mortgage interest.

I'm a business consultant and my sector seems to have quietened down considerably this year reducing my income, to the extent that I'm looking at going back into full time employment for financial security reasons, so not having the mortgage is quite an attractive idea.

My understanding though is that on endowment policies, the greatest value is added to the policy during their final years. Given the endowment policy has only 4 years to run and seems to increase around £8K a year in value, would it be a better idea to let the policy run to maturity in the expectation that this will continue to grow at at least the same rate, leaving us with around £35k+ over the amount needed to clear the mortgage at the end ?

There is also the fact that the endowment policy also acts as life insurance, critical Illness and Disability insurance for myself and Mrs Kris

Then again, there is Brexit and its effect on the markets to consider which may reduce the value of the policy again, meaning we could miss the opportunity we have now to pay off the mortgage and have to make up a shortfall.

If we use the endowment to payoff the mortgage now and invest the future payments that would have been made (mortgage interest and endowment circa £750 p/month) I'm doubtful we would be able to get the same ROI as we are in the final years of the endowment (ISA's etc seem to be paying less than 2% currently)

What would you do ? Is there another course of action or something else I havent considered ?

Thanks all

[subzeer0]

pay it off

[Maysie]

Things may be different with endowment policies nowadays, but my old policy (1990 ish) had harsh financial penalties (disguised as 'great final year bonuses') which meant cashing them early was pretty well always a bad idea.

Personally, I would probably have sacked it off years ago as I prefer a repayment mortgage, but given where you are, I would wait until the full term at this late stage.

[Franco]

I would pay it except for the last 1000 pounds, retaining some of the benefits and the opportunity to remortgage should your situation change in the near future

[MartynJC (UK)]

Before doing anything find out how much it would cost you to get this and wether those are useful to you:

.. the endowment policy also acts as life insurance, critical Illness and Disability insurance for myself and Mrs Kris

If it's only 4 years to go - I'd keep paying and take the money and pay off the mortgage then (except £100) - it seems you are in the minority where the endowment actually delivered! If you're getting 8% that's fantastic!

[JP28]

I would pay the mortgage off. It is big liability which you have a chance to clear. With job security/income risks clearing debts is the way to go.
You can pick up 4–5% on the ‘free’ money you will now have if you want like for like risk via stocks (HSBC/Glencore/BP etc).

[Devonian]

It depends on the type of endowment policy - is it unit linked or with profits?

If it's unit linked then essential its probably worth what its worth and will go up or down depending on the performance of the funds. So if you cashed it in you wouldn't be missing out on any bonuses and it will perform based on the market. You would though lose any protection benefits. Subject to health, you could always do a separate policy.

If its with profits its slightly more complicated. It could be 'unitised' with profits meaning that the bonuses are applied every year and in the main its worth what its worth. Or if its a 'traditional with profits' then you will get a 'reversionary' bonus which is a fancy word for saying an 'annual' bonus, which once given can't be taken away and a 'terminal' bonus which could be added annually or at the end of the plan. These however can be taken away (which is where the problems with endowments occurred in the first place). It's unlikely but possible. Companies have the right to apply an MVR (market value reduction - it used to be called an MVA - market value adjustment, but the FSA made them change it as it only goes down!). Historically cashing it in early could mean missing out on the terminal bonus, so you used to be able to sell them on the second hand market.

My guess is though in 1998 it is a unit linked plan or one that applies the terminal bonus annually.

This is generic as some of the mutual companies or friendly societies had quirky features on their plans. Each company may be different.

So I'd find out exactly what you have and if there is any detriment to surrendering it now or not.

Either way you seem in a good position.

P.S. May be worth getting projections to the end and seeing what more you could potentially make.

If you're cautious though because of circumstances, clear your mortgage, put half the saving back in your pocket to make your life better and invest the other half so you've not lost out.

[Pete D]

pay it off

This in every respect. Being mortgage free is fantastic, and you can pay what you would have done on a mortgage into a savings plan, be it cash or stocks/funds.


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[dandanthewatchman]

2 of my endowments all matured about 4 years ago. I had 3 in total & cashed in 1 early (partly because I had moved in 2007 to an offset mortgage to accelerate the repayment as I had got nervous in the credit crunch)

given the "scandals" linked to these, the 2 I kept to maturity did really well. But I also got mis-selling compensation for one of them about 12 years ago and when I added it all up the terminal bonuses made it worth keeping the first 2 to the end.

From what I can work out of your numbers, the mortgage isn't massive, so that "I'm free of it" feeling wouldn't count much to me.

Another alternative is to auction yours and you may get more that the cash-in value. This is a long established company that can assist you:-

http://www.foster-and-cranfield.co.uk/

[GOAT]

Pay it off !
There are no guarantees going forward
It’s also a great feeling walking into the bank, asking for the balance and paying it off 

[Andyg]

What are the early termination clauses of your mortgage and endowment scheme?

Paying off the bulk of the mortgage (except the last £100) and continuing with the endowment, would be my perfered option. (which is what I did ).

Any other moneys available was then stuffed in to a SIPP.

- - - Updated - - -

What are the early termination clauses of your mortgage and endowment scheme?

Paying off the bulk of the mortgage (except the last £100) and continuing with the endowment, would be my perfered option. (which is what I did ).

Any other moneys available was then stuffed in to a SIPP.

[catch21]

If you pay it off you have certainty, and control.

[Kris]

Thanks for the input so far all, I'm interested in any more thoughts either way.

Yes, it is a unit linked endowment policy so it seems there may not be the large end bonus.

A few of you have suggested paying off the mortgage all bar the last £1000 or £100 . What is the advantage in doing this please ? i.e in leaving the mortgage running but with only a small outstanding amount ?

[Mr Pointy]

A few of you have suggested paying off the mortgage all bar the last £1000 or £100 . What is the advantage in doing this please ? i.e in leaving the mortgage running but with only a small outstanding amount?

It keeps up your credit history. I don't know how long you have had your mortgage but there are a lot more hoops to jump through these days before you get a mortgage.

[vulcangascompany]

A few of you have suggested paying off the mortgage all bar the last £1000 or £100 . What is the advantage in doing this please ? i.e in leaving the mortgage running but with only a small outstanding amount ?

I have a buy to let with a few thousand left on the property - i could pay it off if i wanted but have just kept doing this for quite a few years in case I want to release equity / re-mortgage and do something else!

[sundial]

There is a market for selling endowment policies whereby sellers can usually obtain a better deal compared to cashing in with the assurance company.

Google 'selling my life assurance policy' or similar

IIRC they are sold at auction to specialist buyers … buyers who continue paying the premiums and then receive all the benefits at maturity.

Before you decide to terminate, investigate any potential end of term bonuses.

dunk