Dealing with an endowment shortfall

Money Advice Service

If you took out an endowment policy in the 1980s or 1990s to repay your interest-only mortgage but you’re facing a shortfall it’s important to take action now. The longer you delay, the higher the cost of making up the shortfall. Here’s what you need to do now.

Not sure if you have a shortfall?

If you have an endowment policy backing a mortgage you will have received a projection letter from your provider telling you whether your endowment is on track to pay off the capital amount of your mortgage or if you have a shortfall.

If you are not sure, check with your endowment policy provider now. If you have a shortfall you will have to meet this out of your own funds in order to repay your mortgage capital on its due date. You must put a plan in place to do this.

What to do if you have a shortfall

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.

If you have an endowment shortfall you either need a plan to plug the gap – or to find an alternative solution.

The most important point is don’t do nothing! The problem will not go away.

See the list below for a summary of your different options then speak to your lender or a financial adviser as soon as possible.

You might be able to do the following.

  • 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 below 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 may 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 narrow 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 do so only once a year so you need to time these accordingly.
  • Cash in your endowment early to fund some capital repayment – however speak to a financial adviser first. Whether this will make sense financially will depend on your particular situation. For example, replacement life cover and penalties for cashing in early will need to be taken into account.
  • 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 in order to meet the target amount you need. However you may have to make very large additional payments, which could be unaffordable.
  • Extend the term of your mortgage – hopefully to allow you to find supplementary ways to cover the debt. This is really a last resort option – and may not be possible if you plan to retire soon – in which case it’s best to speak to a financial adviser.

Each of the methods 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.

Can’t afford to make extra payments?

If those options aren’t affordable, you need to contact your lender as soon as possible to discuss your situation. They will 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 smaller 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 essential you take independent financial and legal advice before making any decision.

This article is provided by the Money Advice Service.

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