Did you take out an endowment policy to repay your interest-only mortgage but are facing a shortfall? Then it’s important to take action now. The longer you delay, the higher the cost of making up the shortfall. Find out what you need to do.
Not sure if you have a shortfall?
Endowment providers now issue review letters as standard practice. A system of red, amber and green warnings is used to signal the need to take advice now, to continue to monitor, or take no action for now.
The Association of British Insurers (ABI) has introduced a code of practice on endowment policies – providing minimum standards when issuing these reviews. This includes the provision of an annual review where a mortgage shortfall risk has been identified in the past five years.
If you have a shortfall, you’ll have to pay this out of your own funds to repay your mortgage capital on its due date. You need a plan in place to do this.
What to do if you have a shortfall
If you have an endowment shortfall you either need a plan to plug the gap – or find an alternative solution.
Here's a summary of your options:
- Convert your entire mortgage to a repayment mortgage. This will be guaranteed to repay your debt by the end of the term, although this will increase your monthly repayments. Talk to your lender, and use our Budget Planner to see how much extra you could afford to pay each month.
- Convert a portion of your mortgage to a repayment deal, so that any remaining mortgage capital should be covered at the end of the term. This will increase your monthly repayments but might be more affordable than converting your whole mortgage. Again, talk to your lender and use our Budget Planner to check what you can afford.
- Pay off some of your mortgage capital each month or make lump sum payments to reduce the debt and lower the shortfall. This gives you flexibility to pay as and when you can afford it. However, check with your lender if there are any charges. Also ask when they will give you the benefit from your extra payments – some only do this once a year, so you need to time these.
- Cash in your endowment early to fund some capital repayment – however, it’s important to speak to a financial adviser first. Whether this will make sense financially will depend on your particular situation. For example, you’ll need to take into account replacement life cover and possibly critical illness cover, missed final bonuses and penalties for cashing in early.
- Save into an additional investment product to cover the endowment shortfall – such as a stocks and shares ISA or other investment plan. An adviser will help you choose the most suitable plan and work out what you need to save to meet the target amount you need. However, you might have to make very large extra payments, which could be unaffordable.
- Extend the term of your mortgage – hopefully to allow you to find ways to cover the debt. This is really a last resort option – and might not be possible if you plan to retire soon. Again, it’s best to speak to a financial adviser.
Each of the options above has benefits and drawbacks. Some will guarantee your mortgage will be repaid but could be very expensive. Others are more affordable but you could still be left with a shortfall.
The most important thing is to talk to your lender or an adviser to work out your next steps.
When to get advice
Talk to a financial adviser before cashing in your endowment or stopping any other financial plan as a way of raising funds to reduce your mortgage capital – otherwise you could lose out financially.
Can’t afford to make extra payments?
If the options listed above aren’t affordable, you need to contact your lender as soon as possible to discuss your situation. They’ll be able to work with you to try to come to a manageable solution.
A more drastic solution would be to sell your property and buy a cheaper one to release funds to cover the shortfall. This is a last resort for many people and there are no guarantees that you will sell your home for a price you expect or find a cheaper property that you want to live in.
Finally, if you’re 55 or over, you could consider an equity release scheme, such as a lifetime mortgage or home reversion plan. These are complex products that enable you to release equity tied up in your home while continuing to live in it.
However, they will affect the amount you leave in any inheritance, so it’s important to get independent financial and legal advice before deciding.
