Friday, Dec 19, 2008
How well-endowed are you?
Telegraph: Endowment mortgages: Red alert for policyholders
Tens of thousands more mortgage endowment policyholders will soon discover that their policy is no longer on target to pay off their home loan. Standard Life, which has more than 800,000 policyholders, said it expected the number of maturing policies that will be insufficient to repay the mortgage to increase in 2009 because of poor investment conditions.
[An endowment mortgage is one where, instead of making monthly interest payments, you invest monthly into the stockmarket. After 25 years the returns from the stockmarket should be enough to pay off your mortgage. Except when there's a massive stockmarket crash, in which case you land in negative equity....]
Posted by drewster @ 11:46 PM (356 views) Add Comment
8 Comments
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1. Soreheadbear said...
Really? - Could have sworn you pay an interest only mortgage and an endowment in the hope the endowment clears the capital after 25 years. Clearly this is years out of date as it's been far more fashionable recently not to bother with the endowment bit.......
2. titaniccaptain said...
This is terrible................how many hopes and dreams have been shattered by this?...................
great tittle Drewster lol
3. drewster said...
thanks :)
But yeah, quite a shock for people with endowment mortgages. The moral of the story is that there's no such thing as a free lunch. Endowment mortgages should never have been allowed in the first place, they are based on a false premise.
4. techieman said...
drewster i disagree. The endownment mortgae is not ill conceived and definitely not when it was first used. The reason? There were tax benfits throughout. no the problem is that once the benefits started to be eroded full sum insureds worked out way too expensive, and so the hybrid Low cost or exotic low start low cost came about, where there was an assumption that bonusses would be maintained and therefore once added would be enough to pay off the capital.
Even then that "didnt matter" that much because most people would move every 7 years and most of the amount paid to a repayment mortgage would have only gone to clear the interest. So no all other things being equal the endownment mortgage actually made sense. The problem has been the market itself - as the prices fall then the reasons for having any kind of mortgage over renting disappear, i suppose you could argue that an endownment is a double whammy but most of the people on Endownment mortgages can claim they have been "missold".
If they are missold then what happens? I can tell you - they are basically given a lump sum which puts them where they would be had they had a repayment mortgage instead. That is a one off payment then they have a choice.... they can continue with the endowment or they can convert to a capital repayment, using the lump sum to reduce the term.
So the choice is use the money to reduce the term of a capital repayment mortgage or get a lump sum you can spend on what you like......hmmm in the words of a question of sport - what happened next?
5. techieman said...
http://www.moneymadeclear.fsa.gov.uk/news/product/endowments/how_compensation_is_calculated.html
6. paranoia blue said...
@1 Great “tittle”
Freudian slip or actually meant?
7. drewster said...
techie,
There may have been tax advantages previously, but I don't think there are any now.
Endowment mortgages are based on the false premise that the stockmarket will always outperform interest rates over the long term. If that was the case then there wouldn't be such a thing as a 30-year bond. We only have to look at Japan to see a stockmarket which hasn't recovered for twenty years.
Endowment mortgages are nothing but a clever scheme to provide juicy fees for fund managers.
8. titaniccaptain said...
No Paranoia Blue thats just down the fact that I cant spel.........lol