Endowment Mortgage Shortfall
According to government figures, around 85 percent of current active endowment policies will not provide sufficient funds to pay off the associated mortgage loans when the policies mature. The average shortfall per endowment policy is estimated to be £5,000 and this figure is likely to increase with time.
Since the magnitude of the problem came to light in 2003, 70 percent of those facing a shortfall have sought advice and are now pursuing complaints and alternative investments in order to deal with the issue. Despite this, an estimated 700,000 householders still have not begun to deal with the issue of their shortfall and are losing valuable time to correct the problem.
Dealing with an Endowment Mortgage Shortfall
The most important piece of information to find out is whether your endowment policy will be able to pay off your outstanding mortgage loan, when the policy matures.
If a shortfall is predicted, it is recommended that steps are taken to mitigate the problem. Possible options include:
changing the mortgage component from interest-only to a combination of interest-only and repayment – this would have the effect of reducing the outstanding balance, before the end of the mortgage term is reached;
starting an additional savings plan, perhaps a tracker fund or investment trust (using an ISA to be tax efficient) in order to build up additional capital.
A reputable independent financial adviser or mortgage broker should be able to provide more detailed guidance on these matters.
Obtaining Compensation for an Endowment Shortfall
Since 2003, the focus of the endowment mortgage market has changed significantly. The main focus is now on helping borrowers to refinance their mortgage loans and to claim compensation for mis-selling from insurance companies. As a consequence of this mis-selling, more than £2.3 billion in compensation has been paid to customers and millions more have been paid in fines by some of the best known names in the British insurance industry.
Remember that compensation is available NOT to make up the difference between what the policy holder thought that the policy would be worth and what it is actually worth. Instead, compensation is calculated based on what financially you have now as part of your endowment policy and what you would have had if you had taken out a repayment mortgage. In many cases, the compensation will not be enough to make up the shortfall, so additional plans need to be put in place to make further investments.
The vast majority of endowment policy holders are facing a substantial shortfall; but
a significant number of those facing a shortfall have not yet done anything to make up the difference; and
compensation will not, in many cases, cover the entire shortfall requiring further investments to prevent further problems.