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Almost two million homeowners who took out endowment mortgages in the 1980s and 1990s could struggle to pay off their loans.
Endowment mortgages were sold aggressively by financial advisers in the 80s and 90s and were particularly popular between 1998 and 1993.
Between now and 2015, around two million endowment policies are set to mature, and only one in every 100 is on course to generate sufficient money to pay off the holder’s mortgage. With an endowment mortgage, the borrower simply pays interest to the mortgage lender every month. They do not pay off any of the capital amount borrowed. Instead, they pay a certain amount into an endowment policy every month, which is then invested in the stock market.
The idea is that the policy generates enough to pay off the capital owed at the end of the mortgage term – or more. Such policies have provided large returns in the past, but because they are dependent on the performance of the stock market they are inherently risky.
Financial advisers have been accused of selling these schemes in the past because they earned them juicy commissions. The Financial Services Authority now calculates that the average endowment policy will generate 20% too little to pay off the policyholder’s mortgage.
Standard Life, whose endowments were sold by Halifax, and Scottish Widows, part of Lloyds Banking Group, each believe that 97% of the tens of thousands of borrowers whose endowment policies with them mature this year will face a shortfall.
Prudential now estimates that 75% of its endowment policies will not generate enough money to pay off policyholders’ mortgages. Last year it said just 25 % would face a shortfall and two years ago 19 %. And Pru is one of the best performers in the industry.
Prudential, Scottish Amicable (owned by the Pru), Aviva (which includes Norwich Union and General Accident and Commercial Union), Clerical Medical, Legal & General and Standard Life have all reported a drop in endowment policy payouts over the last year.
Mortgage borrowers facing an endowment shortfall have a number of options: extending their mortgage term (only viable if you are still working); overpaying or switching to a repayment-type mortgage; using savings; selling up and downsizing or considering equity release.
The January/February 2012 issue of Your Mortgage is on sale now. In it we feature expert predictions on what will happen to house prices, interest rates and the wider economy in 2012. We also explain the latest State help for first-time buyers, weigh up the relative merits of offset mortgages, and offer handy hints and tips on making sure you have the right home insurance in place. Plus we have all the regular features and our invaluable mortgage basics section. Get your copy now for the latest news, information and help
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