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Endowment Mortgage Misery



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Millions of homeowners on endowment mortgages are set to realise just how short their policies have fallen in the next five years.  The boom years for sales of endowment mortgages was between 1988 and 1993, when around four in every five homeowners were sold one.  Many borrowers bought into these policies, believing that they could reap a return of around £100,000 with an investment of as little as £50 per month. 


Many 25-year policies will be ending between now and 2015 and some have nose-dived to a meagre £30,000.  A 2008 report showed that the average shortfall was £7,200, but with the value of the policies having fallen more since then, experts now say it’s more like £10,000.  A short summary of endowment policy providers looks like this;

 

  • Standard Life (sold by Halifax) estimates 97% of the 46,000 policies maturing this year will fail to meet their targets
  • Scottish Widows (now part of the Lloyds TSB Banking Group) says that 97.6% of policies will have a shortfall
  • Prudential says that 75% of its policies will not meet targets and that its 25-year, £50 per month policies that matured in February were a meagre £35,834.
  • Scottish Amicable policy payout is currently £37,635.

 

These poor payouts were also reflected in policies from Aviva (which includes Norwich Union, General Accident and Commercial Union), Clerical Medical, Legal & General and Standard Life.


At peak, there were 11 million mortgage endowments but many have matured or been cashed in; there are still 4.9 million still active.  One of the worst performers last year was Life Association of Scotland, which paid out just £23,785.  In the boom five years for endowment policies, which started in 1988, 2.1 million homeowners signed up for interest only mortgages with the vast majority relying on an endowment policy to make up the lump sum.  High street banks and building societies effectively encouraged homebuyers to gamble their properties on the stock market because they were being paid massive commissions by insurance companies to sell policies.


People were told by the salesmen that with-profits endowments would build up a pot of money over 20 to 25 years by adding bonuses each year to the money saved and then an extra big lump sum at the end.  This was supposed to compensate for any erratic stock market movements and homeowners were told that the policy would not only pay off their mortgage but they would have money left over.  To add insult to injury, it’s too late for most people to complain, as this had to be done within three years of being informed of a potential shortfall by the insurance company.


How Endowment Payouts Have Fallen

 

1990

2000

2010

%fall

Clerical Medical

£100,433

£104,289

£30,561

-69.6

Commercial Union (CGU)

£100,483

£118,567

£30,679

-69.5

Friends Provident

£100,370

£102,341

£29,966

-70.1

General Accident

£93,595

Na

£36,979

-60.5

Legal & General

£89,267

£93,678

£35,603

-60.1

Norwich Union

£100,393

£89,518

£27,884

-72.2

Prudential

£85,218

£99,994

£35,834

-58.0

Scottish Amicable

£100,630

£95,569

£37,635

-62.6

Standard Life

£107,177

£110,373

£28,139

-73.7

 

Source: Money Management (Based on a 25-year policy taken out by a 29-year-old man paying £50 per month)