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Is The Uk On The Verge Of Another Endowment Policy Crisis?

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Is the UK on the verge of another endowment policy crisis?

In what is sure to be an area of concern in the future for many homeowners in the UK, it has been revealed that up to 99% of endowment policies sold by some UK insurance companies may ultimately fall short of their intended target. Many people use these to pay off their homes after covering interest directly over the mortgage period and paying additional sums into their endowment fund.

This is certainly a case of déjà vu for the UK market with a similar situation arising just over a decade ago which saw hundreds of thousands of home owners informed that they would need to increase their payments to ensure that their endowment covered their outstanding mortgage. While the recent fall in worldwide stock markets and property prices has obviously had a massive impact upon the value of endowment funds many people will be shocked to find out we are on the verge of another crisis in the endowment market, although this time it could be much worse.

Large numbers of UK homeowners will be sitting pretty today assuming that their endowment will pay off their mortgage upon expiry only to find out that they could be left tens of thousands of pounds short. To compound the problem, property prices have fallen in the UK which will further devalue what is the main asset for the vast majority of the UK public, i.e. their home.

More fuel to the HPC fire.

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What do they mean "another endowment crisis". It's the exact same one as ten years ago, just now the policies are starting to come to maturity, so the reality is finally hitting home. There shouldn'tt be any 'surprises' for people in the shortfalls unless they are either incredibly stupid, or haven't opened their mail for 5 years.

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What do they mean "another endowment crisis". It's the exact same one as ten years ago, just now the policies are starting to come to maturity, so the reality is finally hitting home. There shouldn'tt be any 'surprises' for people in the shortfalls unless they are either incredibly stupid, or haven't opened their mail for 5 years.

Totally agree I have had a number of endowments and yes I have received numerous red, amber and on one occasion a green type letter.

In fairness those who hold endowments have been warned over the last few years so no real surprises should be expected when the maturities come out

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In what way, if you don't mind me asking?

Forgive me being possibly a little thick, but I'm not seeing any way in which it would help lower prices, significantly at least.

Less money available to move up to a bigger place certainly, and there would be a need to cover the shortfall I guess - but would it not be possible to remortgage to cover that?

I'm of the impression that people at the end of their mortgage term will generally be staying put or looking to downsize rather than move to a more expensive place, maybe I'm wrong.

Will it have a big effect, how many people and how much money is involved?

Thoughts welcome.

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In what way, if you don't mind me asking?

Forgive me being possibly a little thick, but I'm not seeing any way in which it would help lower prices, significantly at least.

Less money available to move up to a bigger place certainly, and there would be a need to cover the shortfall I guess - but would it not be possible to remortgage to cover that?

I'm of the impression that people at the end of their mortgage term will generally be staying put or looking to downsize rather than move to a more expensive place, maybe I'm wrong.

Will it have a big effect, how many people and how much money is involved?

Thoughts welcome.

Yes people will remortgage the problem is the banks have limited lending capabilities, if the banks lend to these people there will be less to lend out to buyers.

How this will all play out is anyone's guess, but my bet is it won't be positive.

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I'm of the impression that people at the end of their mortgage term will generally be staying put or looking to downsize rather than move to a more expensive place, maybe I'm wrong.

I reckon that the shift will moving into a more energy efficient property over a bigger/smaller house in the near future.

Winter 2009 and 2010 are certainly going to be hard on families in the UK, and even more so for the legions of pensioners whose savings have been devastated over the past two years.

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In what way, if you don't mind me asking?

Forgive me being possibly a little thick, but I'm not seeing any way in which it would help lower prices, significantly at least.

Less money available to move up to a bigger place certainly, and there would be a need to cover the shortfall I guess - but would it not be possible to remortgage to cover that?

I'm of the impression that people at the end of their mortgage term will generally be staying put or looking to downsize rather than move to a more expensive place, maybe I'm wrong.

Will it have a big effect, how many people and how much money is involved?

Thoughts welcome.

Four Scenarios

* Bank of Mum and Dad will be calling in the loans!

* Bank of Mum and Dad will close it's doors!

* Bank of Mum and Dad will crowd out the FTB!

* Bank of Mum and Dad will realise that they cannot pay off their mortgage, Bank of Mum and Dad may also be retired or close to retirement...either way they cannot meet the shortfall. Bank of Mum and Dad's house gets repo'd!

Bank of England is not the lender of last Resort for Bank of Mum and Dad...in fact no-one can lend Bank of Mum & Dad any money as Bank of Mum and Dad ARE NOT A BANK!!!!

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OK, so I am a relatively simple person who has spent less than 20% of my life living in your country.

I really struggle to understand this whole endowment thing. From what I understand, there are three basic options for mortgages in this country at present :

- Pay interest only and hope that the price of your home when you want to sell it is higher than the sum of the purchase price and the amount that you have MEWed. Risky .....

- Pay interest only and invest additional money in other assets hoping that these other assets will grow even faster than house prices and are worth at least the initial purchase price plus the MEWed amount. Given that these other assets are probably highly correlated to house prices, the endowment policy route seems to be foolish. A further drawback of this route is that it is probably heavily laden with fees to manage the endowment "assets".

- Make payments every month which cover interest and reduce principal. In the early years, principal repayments are small due to the way that compound interest works but over a 10 to 20 year horizon, in later years, most payments are applied to the principal. Boring but safe.

To my way of looking at the world, the interest only and endowment routes are foolhardy. Paying off principal with certainty seems to be the only logical, cost effective way to proceed.

What am I missing ?

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What do they mean "another endowment crisis". It's the exact same one as ten years ago, just now the policies are starting to come to maturity, so the reality is finally hitting home. There shouldn'tt be any 'surprises' for people in the shortfalls unless they are either incredibly stupid, or haven't opened their mail for 5 years.

You hit the nail on the head there

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To my way of looking at the world, the interest only and endowment routes are foolhardy. Paying off principal with certainty seems to be the only logical, cost effective way to proceed.

What am I missing ?

At least three major factors there:

1. Financial advisors who make good commissions on selling endowments.

2. A tax regime that distorts the market in many ways, and means for example someone like me is much better off on interest-only (repayment when I reach pension age) than on a repayment mortgage.

3. The bubble-mania that led sheeple to maximum-leverage.

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OK, so I am a relatively simple person who has spent less than 20% of my life living in your country.

I really struggle to understand this whole endowment thing. From what I understand, there are three basic options for mortgages in this country at present :

- Pay interest only and hope that the price of your home when you want to sell it is higher than the sum of the purchase price and the amount that you have MEWed. Risky .....

- Pay interest only and invest additional money in other assets hoping that these other assets will grow even faster than house prices and are worth at least the initial purchase price plus the MEWed amount. Given that these other assets are probably highly correlated to house prices, the endowment policy route seems to be foolish. A further drawback of this route is that it is probably heavily laden with fees to manage the endowment "assets".

- Make payments every month which cover interest and reduce principal. In the early years, principal repayments are small due to the way that compound interest works but over a 10 to 20 year horizon, in later years, most payments are applied to the principal. Boring but safe.

To my way of looking at the world, the interest only and endowment routes are foolhardy. Paying off principal with certainty seems to be the only logical, cost effective way to proceed.

What am I missing ?

I would agree with most of that. However compound interest only exists on interest only mortgages. When you repay the capital the interest does not compound, as the capital value falls every month. Not by a huge amount - but still.

I even learned that from a certain Hamish. ;)

So yes - the motivation in paying down the capital every month is actually stronger than you thought. It is the only option where you can negate the effects of compound interest working against you.

I suppose the flip side is you hope your own investemnts gain compound interest if you go down the 'interest only' route. Risky IMO.

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OK, so I am a relatively simple person who has spent less than 20% of my life living in your country.

I really struggle to understand this whole endowment thing. From what I understand, there are three basic options for mortgages in this country at present :

- Pay interest only and hope that the price of your home when you want to sell it is higher than the sum of the purchase price and the amount that you have MEWed. Risky .....

- Pay interest only and invest additional money in other assets hoping that these other assets will grow even faster than house prices and are worth at least the initial purchase price plus the MEWed amount. Given that these other assets are probably highly correlated to house prices, the endowment policy route seems to be foolish. A further drawback of this route is that it is probably heavily laden with fees to manage the endowment "assets".

- Make payments every month which cover interest and reduce principal. In the early years, principal repayments are small due to the way that compound interest works but over a 10 to 20 year horizon, in later years, most payments are applied to the principal. Boring but safe.

To my way of looking at the world, the interest only and endowment routes are foolhardy. Paying off principal with certainty seems to be the only logical, cost effective way to proceed.

What am I missing ?

an endowment (indeed a PENSION) mortgage was an IO loan for a fixed term with payments into an investment vehicle at the same time.

so you paid the IO and a sum into an endowment or pension scheme with your monthly payment.

then the insurance industry, to earn more commission, introduced the LOW COST endowment scheme.

The advantage was that payments included life cover, and the cost of the endowment was less than the cost of a repayment as the endowment was to earn in excess of the payments in, so to just cover the mortgage repayment at the end, the scheme had to produce the profits to make up for the lower cash input.

Many were promised the scheme COULD produce an excess.

Mis-selling apparently was wide spread, although both endowment mortgages I took out had to be presented by solicitors to explain the risks, so I am skeptical mis-selling was wide spread.

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OK, so I am a relatively simple person who has spent less than 20% of my life living in your country.

I really struggle to understand this whole endowment thing. From what I understand, there are three basic options for mortgages in this country at present :

- Pay interest only and hope that the price of your home when you want to sell it is higher than the sum of the purchase price and the amount that you have MEWed. Risky .....

- Pay interest only and invest additional money in other assets hoping that these other assets will grow even faster than house prices and are worth at least the initial purchase price plus the MEWed amount. Given that these other assets are probably highly correlated to house prices, the endowment policy route seems to be foolish. A further drawback of this route is that it is probably heavily laden with fees to manage the endowment "assets".

- Make payments every month which cover interest and reduce principal. In the early years, principal repayments are small due to the way that compound interest works but over a 10 to 20 year horizon, in later years, most payments are applied to the principal. Boring but safe.

To my way of looking at the world, the interest only and endowment routes are foolhardy. Paying off principal with certainty seems to be the only logical, cost effective way to proceed.

What am I missing ?

The big fat profit at the end of the term, because you pay off the debt and have a nice lump sum as well. It was a one way bet.

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To my way of looking at the world, the interest only and endowment routes are foolhardy. Paying off principal with certainty seems to be the only logical, cost effective way to proceed.

What am I missing ?

I suppose the endowment shortfall issue is a relatively new phenomena. Up to (say) 10 years ago, endowments were delivering handsomely. An endowment paying out in (say) 1999 would have been started in 1974 and have had the benefit of inflation driven growth in the 70s and 80s.

These rates of return entered the public's psyche and enabled the endowment product to be aggressively marketed in the mid 80s to late 90s.

So whereas in the noughties a repayment mortgage may be the better option, in earlier times it may have been financially beneficial to go for an endowment.

Part of the trouble is that endowments are such a long term investment. Over any 25 year period, the state of the world's finances can (as we have seen) alter quite dramatically!

Regards

Sox

Edited by Bootsox

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I worked for a insurance admin outsourcing company in Croydon a few years ago. I was required to make code changes to a program they had written three years before. The program took an endowment policy's value and determined if, given future premium payments and future investment returns if the policy would mature to pay off the mortgage.

If the amount fell short the program was meant to calculate the additional premium needed from the policyholder to ensure the correct maturity value.

The program was written in a language called AWB (Actuarial Work Bench) which I had never seen before and never seen since. It turned out AWB was unique to this company. No-one else uses it. The guy who had written the program left the company after writing it. He left no documentation. The guy who took over from him was leaving in the month I joined angry at recent management decision to relocate the office. He left no documentation. There was no documenation in the code. No-one else in the company knew how it worked.

It turned out it found the roots of polynomial functions (essentially a goalseek), a method Maths grads will recognize: the Newton Raphson method. Newton Raphson is not so difficult to understand but to use it you need to know the form of the function and its first order differential. None of this was documented.

I told my boss I couldn't progess with it. They handed it to a Maths PhD. He couldn't solve it either. Such code is a piece of cake to program in Excel VBA, VB.net or C# - you know, industry standard languages.

There is a silver lining. In one of later contracts with a different company in The City I had to write a similar procedure but this time in SQL. Success.

However there is controversy here too.

The last piece of work I did for this later company was to document the system I had spent about 18 months writing entirely alone. To ensure I wasn't played for a fool I sent them a small sample of my documentation and demanded payment in return for the complete set.

They refused to honour the invoice, pig-ignorant of the complexities. They now have a system they don't understand - this is an exact mirror of the stupidity the Croydon company showed.

I am quite sure they think they have played me for a fool, but believe me its the other way around. Even before I joined that company, they already had a program in place to do these calculations - its a widely used system called Prophet.

They thought they had to rewrite those Prophet programs in SQL (which they employed me 18 months to do) in order to connect them to the internet. Wrong! Unbeknown to them they already had the sofware to enable the connection without any further cost or inconvenience. They never actually needed me at all!

I got a highly paid contractor role for 18 months because of my clients's own ignorance!!

In fairness I was honest to tell my boss on the first day but he completely overruled me. Fair enough.

Note to former boss : So long and thanks for all the dosh. And when you want your unnecessary program modified you owe me £14,000 first.

Edited by Dave Spart

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I worked for a insurance admin outsourcing company in Croydon a few years ago. I was required to make code changes to a program they had written three years before. The program took an endowment policy's value and determined if, given future premium payments and future investment returns if the policy would mature to pay off the mortgage.

If the amount fell short the program was meant to calculate the additional premium needed from the policyholder to ensure the correct maturity value.

The program was written in a language called AWB (Actuarial Work Bench) which I had never seen before and never seen since. It turned out AWB was unique to this company. No-one else uses it. The guy who had written the program left the company after writing it. He left no documentation. The guy who took over from him was leaving in the month I joined angry at recent management decision to relocate the office. He left no documentation. There was no documenation in the code. No-one else in the company knew how it worked.

It turned out it found the roots of polynomial functions (essentially a goalseek), a method Maths grads will recognize: the Newton Raphson method. Newton Raphson is not so difficult to understand but to use it you need to know the form of the function and its first order differential. None of this was documented.

I told my boss I couldn't progess with it. They handed it to a Maths PhD. He couldn't solve it either. Such code is a piece of cake to program in Excel VBA, VB.net or C# - you know, industry standard languages.

There is a silver lining. In one of later contracts with a different company in The City I had to write a similar procedure but this time in SQL. Success.

However there is controversy here too.

The last piece of work I did for this later company was to document the system I had spent about 18 months writing entirely alone. To ensure I wasn't played for a fool I sent them a small sample of my documentation and demanded payment in return for the complete set.

They refused to honour the invoice, pig-ignorant of the complexities. They now have a system they don't understand - this is an exact mirror of the stupidity the Croydon company showed.

I am quite sure they think they have played me for a fool, but believe me its the other way around. Even before I joined that company, they already had a program in place to do these calculations - its a widely used system called Prophet.

They thought they had to rewrite those Prophet programs in SQL (which they employed me 18 months to do) in order to connect them to the internet. Wrong! Unbeknown to them they already had the sofware to enable the connection without any further cost or inconvenience. They never actually needed me at all!

I got a highly paid contractor role for 18 months because of my clients's own ignorance!!

In fairness I was honest to tell my boss on the first day but he completely overruled me. Fair enough.

Note to former boss : So long and thanks for all the dosh. And when you want your unnecessary program modified you owe me £14,000 first.

excel spreadsheets could do the job easily.

£99 from any good MS OEM supplier.

lucky for many in IT, many still believe you need 3 servers for a 20 man office.

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DS,

Good enjoyable anecdote. Typical of the high handedness of some companies.

At my company, permanent employees are treated like sh1t whereas contractors are feted and rewarded handsomely!

Sox

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DS,

Good enjoyable anecdote. Typical of the high handedness of some companies.

At my company, permanent employees are treated like sh1t whereas contractors are feted and rewarded handsomely!

Sox

Glad you liked it. ;)

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