How to Resolve an Endowment Mortgage Shortfall
If you're faced with a shortfall on your endowment mortgage, an expert broker can help you resolve it.
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Endowment policies were often sold alongside interest-only mortgages in the 1980s and ‘90s to give people a means of paying off their debt at the end of the mortgage term. Not all of these plans performed as expected, though, leaving some borrowers with a shortfall.
But help is at hand! If you’re locked into an endowment mortgage with a projected shortfall, this guide is for you.
Here, we’ll tell you what kind of workaround solutions and fallback options are available, how to make a compensation claim and where to find independent advice on endowment mortgage shortfalls.
What is an endowment mortgage shortfall?
An endowment mortgage shortfall is what you might have if you were sold an endowment policy as a repayment strategy for an interest-only mortgage, but the policy is set to underperform and won’t leave you with enough capital to pay off your mortgage debt at the end of the term. The ‘shortfall’ is the difference between the endowment policy’s payout and the amount still outstanding on your interest-only mortgage at the end of the agreement.
Deals like this can be referred to as ‘endowment mortgages’ and they were common in the 1980s and ‘90s. But since some of the underlying investments for these agreements underperformed and were found to have been mis-sold, endowment policies are more commonly offered as standalone investment plans these days.
If you have an interest-only mortgage backed by an endowment plan, you should receive a projection letter from your policy provider telling you whether your investment is on course to generate enough payout to settle the mortgage debt. If that isn’t the case, you’ll need to take action. Read on to find out what to do if you have an endowment shortfall.
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What are your options if you have one?
If you have a projected shortfall in an endowment policy that was taken out as a repayment vehicle for an interest-only mortgage, you must take action. Failing to do so could mean you end up with a massive debt at the end of your mortgage term, and if you’re unable to pay it, this could mean having to sell up.
But the good news is that we’re here to help. We have outlined some of the most viable fallback options below and can arrange a no-obligation chat with a mortgage broker who specialises in these situations.
Here are the options that could be open to you if you’ve had an endowment mortgage shortfall:
Option 1: Switch to a repayment mortgage – It may be possible to refinance your interest-only mortgage and switch to a repayment plan, either with your current lender or a new one. This will likely mean higher monthly payments, but you could be paying less overall by chipping away at the interest each month.
Option 2: Switch to a part-and-part mortgage – These hybrid mortgages are part interest-only and part repayment, so your monthly payments chip away at some of the mortgage debt as well as the interest. This means you would have a smaller amount to pay off at the end of the term than you would with a standard interest-only agreement, so an underperforming endowment plan might cover this.
Option 3: Set up another investment plan – If you have money to invest, taking out an alternative financial product could help you generate enough funds to settle your mortgage debt at the end of the term. Speak to an independent finance advisor about options including, investment ISAs, bonds, unit trusts and more.
Option 4: Pay off the capital using other investments – This could include equity from another property you own or a pension lump sum, if you’re of retirement age. You could also cash in your endowment early and pay a chunk off your mortgage so there’s a smaller debt to settle at the end of the term. Be sure to speak to an independent financial advisor or a mortgage broker before doing this.
Option 5: Remortgage to a retirement interest-only mortgage – Seen as an alternative to equity release, more and more providers are offering interest-only mortgages that don’t need to be paid off until you die or go into long term care; upon which the property would be sold and the mortgage settled from the proceeds. Be sure to get advice from a suitable financial advisor if considering this route.
Last resort options
If none of the options we’ve covered above are viable, there could be other fallbacks available to you as a last resort.
- Extending your mortgage term: This could buy you more time to generate the funds needed through your investments to pay off your mortgage at the end of the term. This isn’t a decision to be taken lightly, as it will mean paying more in interest, so be sure to take professional advice before considering it.
- Sell the property: In extreme cases, some people in this situation resort to selling their property and downsizing so they can use proceeds from the sale to cover the shortfall. Keep in mind that there are no guarantees you will be able to raise enough capital to cover the shortfall or find a more affordable place to live.
- Equity release: If you’re over 55, taking out an equity release product such as a lifetime mortgage could allow you to release tax-free capital from your home to cover the shortfall. Releasing equity is something that should never be done lightly, and in this case, the inheritance you leave behind would be affected. With this in mind, be sure to speak to an expert to weigh up all of the options before considering this.
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Are you entitled to compensation?
If you have a shortfall on your endowment mortgage, you’d likely only be eligible for compensation if you were poorly advised by a broker or a financial advisor. If they didn’t mention the possibility of a shortfall at the end of your mortgage term or told you the endowment policy would definitely cover your mortgage debt, you may qualify for compensation.
You may also have the right to make a claim if…
- Your advisor didn’t carry out a full financial risk assessment
- The fees and charges weren’t fully explained to you
- Your advisor told you to cash in an existing endowment policy and sold you another
- Your endowment mortgage was set up to run into your retirement and your broker didn’t check whether you’d have enough income to continue making payments
You’re unlikely to have grounds for a claim if the endowment policy simply underperformed or didn’t generate enough to pay off your debt.
How to make a compensation claim
You will have a deadline to make your complaint. It will be either six years from the date the policy was sold or three years from the date you realised you have grounds to complain.
Assuming your claim will fall between either timeframe, here are the steps to take…
- Pull together as much documentation for the claim as possible. You can request any missing paperwork from the company that sold you the policy
- Write to the company that sold you the policy and explain why you feel you have ground to complain. You can find a template complaint letter on thisismoney.co.uk
- Give the company a maximum of eight weeks to respond. This is how long they’re entitled to by law. They might offer you compensation before this point
- If your endowment mortgage provider doesn’t respond or you’re unhappy with their response, you can escalate the matter by contacting the Financial Ombudsman Service (FOS). They will conduct an independent review of your case. You must have made a complaint and received the “final response” from the endowment mortgage provider before approaching the FOS or they won’t look at your case.
Bear in mind that any compensation you receive won’t necessarily cover your interest-only mortgage’s shortfall, and once you accept an offer, you won’t be able to make any further claims related to the same endowment mortgage.
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Got a shortfall on your endowment mortgage? Get the right advice today!
If you have a shortfall on your endowment mortgage, there are options available, but the only way to make sure you choose the right one is by speaking to an expert first.
We offer a free broker-matching service and can introduce you to the endowment mortgage advisor who’s the best fit for your needs and circumstances. They can offer you bespoke guidance on the best solution to your shortfall and negotiate the most favourable deal if you need to refinance, extend your mortgage term or take equity release.
How a mortgage broker can help you choose the right option
The right mortgage broker can go through all of the above options with you, explain the pros and cons of them and help you find the right solution to your endowment mortgage shortfall.
We work with a network of expert mortgage brokers who specialise in endowment mortgages. They’ve helped countless customers find the right solution to their shortfalls, so they have the right expertise and experience to deliver the best outcome for you.
Whatever your background, we can introduce you to your ideal advisor through our free broker-matching service. If you’re considering refinancing, we will match you with a remortgage expert, and if you think equity release might be the best course of action, we can arrange a free, no-obligation chat with a specialist equity release expert.
Moreover, if it’s investment advice you need because your endowment policy is underperforming, we can arrange a free consultation with an independent financial advisor through our sister service, Online Money Advisor.
Call 0808 189 2301 or make an enquiry online and we’ll introduce you to your perfect mortgage broker for a free, no-obligation chat about your options today.
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