Repayment Options
Endowments
| With profit
| Low cost | Unit
linked | Other |
Advantages | Disadvantages
Disadvantages Of Endowment Mortgages
Aside from the general points that relate to most interest-only
products, there are a few added features of endowment mortgages
which may influence your decision on whether to use one
as a repayment vehicle for your mortgage. Not all these
disadvantages will necessarily apply to every single type
of endowment policy in all circumstances. Always check the
policy literature, ask the life company or consult an expert
if you are in any doubt.
There is a very real risk that the fund will not perform
well enough to cover the capital lent to you for your mortgage.
Most endowments that are used to repay mortgages will not
guarantee that you will not be left with a shortfall. The
size of your fund is largely dependent on your insurance
company's ability to invest.
Many endowment holders have hit trouble over the last
few years due to falls in stock markets that have impacted
the equities into which both unit linked and with-profits
endowment funds are invested.
As a result, some companies have been announced severe
cuts in the payout values of maturing policies by way of
reductions in the final bonus rates for most with profits
policies. Unit linked policies are affected more directly
by the stock markets as the value of the fund in which units
are bought has been hit by reductions in the equities into
which the fund is invested. During periods of high interest
rates, a large portion of your monthly repayment is taken
up with interest. This may mean that less is being paid
into your endowment than is necessary to meet the investment
objective.
Advisers get whopping great commissions from the sale of
endowments. This can be anything up to £1500, so the unscrupulous
amongst them may push for you to buy one even if it is not
the most appropriate product.
One of the reasons that the lenders can afford to be so
generous is because endowments are relatively inflexible.
You can pay heavily if you wish to cash in the policy before
it has finished its term, which means that the lenders generally
enjoy your custom for many years. The earlier you try to
cash in, the worse the charges in comparison to what has
been paid in. You may not get back as much as you have paid
out.
There are higher set up costs, charges, administration
costs and commission payments in the early years than there
is with a repayment mortgage. These are hidden within the
monthly premiums. You should always find out what the charges
are and check past performance, not forgetting that this
is no guarantee of future investment performance.
Endowments are heavily 'front-end loaded', which means
that they may have little or no cash-in value for the first
few years of the term. This is because as much as a third
or more of your premium can be taken up paying introducer,
administration and management fees during the first few
years or so. It is only once these charges have been paid
for that the value starts to accrue more quickly, boosted
(depending on the type of endowment) by annual bonuses being
added to the policy value.
With the exception of unit-linked endowments, it is normally
impossible to extend the term of the endowment policy. This
can limit the value of any property you can move to, unless
you wish to take out additional investment products. With
a repayment loan, you can stretch out payments to cope with
increased borrowing, with an endowment you can only raise
the payments and there is likely to be a limit on how much
you can afford.
You have to have life cover as it is built in to the product.
Some people may have no dependents and enough assets to
pay off the loan and may therefore have no requirement for
life assurance.
