Guide to Endowment Mortgages
What You Need to Know
- An Endowment Mortgage was a mortgage arrangement which required borrowers to save money in an investment account which was supposed to earn enough to repay the capital debt at the end of the mortgage period.
- They were popular in the UK in the 1980’s, 1990’s, and early 2000’s, when as many of 33% of mortgages taken out were endowment mortgages.
- The risk of an endowment mortgage is that investments can go down as well as up, and many policies have failed to earn as much as predicted leaving borrowers with a shortfall on their mortgage debt.
- Many policies were mis-sold by mortgage brokers and estate agents who were paid to encourage borrowers to choose an endowment mortgage and failed to warn them of the risks.
- More than 2 million complaints have been made and compensation for mis-selling is now in excess of £2.7 billion.
- If you hold an endowment mortgage you can still claim compensation, and there are financial options if you are facing a shortfall on your policy.
- Endowment Mortgages are no longer available in the UK.
What is an Endowment Mortgage?
An Endowment Mortgage is a complicated financial product which combines mortgage with a life insurance policy, and was commonly used alongside an Interest-only Mortgage in the 1980’s, 1990’s, and the first decade of the 21st century.
During this period they were a hugely popular way of getting a mortgage if you were in a low income household, or wanted to minimise your monthly repayments. They are designed to work like a monthly savings plan, where instead of paying off your mortgage, you pay an interest-only mortgage, and put another amount of money into an endowment policy.
The money put into the endowment policy is then invested and after the agreed period of the endowment, the money is returned to you with all the profit it has earned during the period. The length of an endowment policy is commonly 25 years, but sometimes as long as 30 years. The idea was that this lump sum you receive at the end is enough to pay off the outstanding debt of the mortgage, and should have money left over as well.
Part of the endowment policy also included a life insurance policy which guaranteed a big enough return to repay the mortgage if you die during the period of the endowment.
So why are they not popular anymore?
The theory behind an Endowment mortgage is very appealing and it is little wonder that during the 1980’s, 1990’s, and the first decade of the 21st century, they were so popular.
The problem was that the reality behind an endowment mortgage rarely lived up to the promise. The money put into the Endowment Fund was invested, and the problem with investments in stocks and shares is that prices can go up as well as down.
When endowment mortgages first appeared, the market was ideally set up for them. In the 1980’s, inflation was high, interest rates were as well, and there was a promise of tax relief on premiums for an endowment policy. They looked at this point to be a great deal.
But that situation has now changed significantly. Crucially, the tax relief offer disappeared a long time ago, and the decline in inflation and interest rates has slowed down the growth of endowment policy investments.
Indeed many people holding an endowment policy have now been warned that when they receive their lump sum, rather than having money left over after paying off their mortgage debt, they are likely to not have enough to cover the full amount of debt they have on their house.
The Mis-selling Scandal
There was another reason why Endowment policies took off in such a big way in the 1980’s and 1990’s besides the appeal nature of the deal at the time, because during this period, those people who sell mortgages such as home loan firms, estate agents, and mortgage brokers, would earn a large commission for signing people up to them.
Needless to say, this incentivised mortgage sellers to push people towards an Endowment mortgage even if it was not the right policy for them. They also failed to give people sufficient warnings about the risks of an endowment policy and the fact that investments could go down as well as up.
In 1999, the regulators first looked at these policies and passed new rules requiring lenders to write to policy holders using a traffic light system. Those holders who received a green letter were informed that their endowment policy was on track to repay their mortgage in full when it matured.
If you received a yellow letter, this meant that your investment needed growth of between 6% and 8%. Recipients were told “we consider it possible that your plan may not pay out enough”.
Those receiving a red letter received the news that “we consider there is now a risk that your plan may not pay out enough... We therefore strongly suggest you consider taking action”. This meant that growth of more than 8% was needed on your policy.
At the time it was thought that 49% of policies would be green, 37% yellow, and 14% red.
The result of this mis-selling has been that millions of people have found out that their endowment policy will not be enough to cover their mortgage amount, leaving them in a very difficult financial position.
What can I do if I already have an Endowment Policy?
If you are one of the people who hold an endowment mortgage, and you believe you were mis-sold it, there are a few options open to you.
- Compensation: You might be able to claim compensation. Back in 2012, the Financial Services Authorities had already received more than 2 million complaints about Endowment mortgages, and more than £2.7 billion had been paid out in compensation.
The first step is to contact the firm that sold you the policy. They will have a customer services department and there is an expectation upon them to settle any justifiable claims put to them. If you are not sure who to contact, you can speak with the Financial Services Ombudsman who should be able to point you in the right direction. Call them on 0300 123 9123 between 8am and 8PM on weekdays.
If you have not received a satisfactory response within eight weeks of making your complaint, the next step is to make a complaint a complaint directly to the Financial Services Ombudsman. You can do this by calling the same number, 0300 123 9123, or by looking at their online factsheet.
There are some provisos to making a claim. Not everyone who holds an endowment policy will be entitled to compensation. You must be able to demonstrate that you were mis-sold the policy. The Financial Ombudsman will be able to advise you on whether you have the right to make a claim.
Each lender will also have set a time limit for making a complaint, which will have a clear final date. If you miss this final date, it will be too late to complain and you will no longer be able to get compensation. Check with the financial firm you used what this deadline is, and as a general rule, if you want to make a complaint, make sure you do it sooner rather than later.
Finally, there are a myriad of companies out there offering to handle your compensation claim for you. Do not use these companies. They will charge you for their services, possibly a percentage of the money you are entitled to, and this is an expense you don’t need to take on. There are clear rules for how such complaints must be handled, and the Financial Ombudsman will offer any support you need.
How to handle a shortfall: If you believe you are going to be faced with a shortfall on your Endowment policy and you are not entitled to compensation, there are still a number of options.
The advice from financial experts is usually to retain your endowment policy, which you have already paid a lot into. Cashing out early is a route that many people have taken with their Endowment policies and this usually carries a big penalty and leaves you worse off than you need to be.
Instead of cashing out, split your mortgage so that he amount covered by the endowment policy goes down, and your policy does have enough to cover it. You should then take out a regular repayment mortgage to cover the outstanding amount.
This option will cost you more money than you expected when you took out your endowment policy, but it does at least mean that the money you have already put into the policy is not wasted.
Another option is to sell your endowment policy. There are companies out there who deal in traded endowments and they are often willing to pay a substantial amount to take on such a policy.
It is important before following either of these routes to take independent financial advice to be sure you are doing the right thing. To find a good advisor, you can contact the Citizens Advice Bureau.
Can I still get an Endowment Mortgage?
The short answer to this question is, no. Endowment Mortgages have not been available in the UK for almost a decade now.
You can still get interest-only mortgages which require you to have a separate plan to cover the capital debt of the mortgage. However these days the most common approach is putting money into a stocks and shares ISA, rather than an endowment policy.
- Read our top tips for getting accepted for a mortgage.
- Read the advice of the Financial Ombudsman on Endowment Mortgages here.
- Check out our guide to the UKs top mortgage lenders and brokers.