Borrowing Against Your Endowments
Endowments, that is life assurance policies used to accrue funds with which to pay off your mortgage have been hauled through the gutter in various newspapers and have become the subject of solicitors trying to make even more money out of what they call a scandal. The so called endowment scandal is nothing of the sort.
Don’t get us wrong, we are not saying there aren’t thousands of people who now face shortfalls in paying off their mortgages, and we are not saying that we don’t feel sympathy for them, but a scandal it isn’t. It was a fact of life, it was going to happen. The markets changed and it took a lot of people very much by surprise.
But if you have an endowment as part of your mortgage here’s something that you might find useful.
First of all, when the endowment problem first started to raise its head there were people that upped sticks and did one of two things: they either cancelled their endowments or they sold them. The question has to be asked: why?!
For years Endowments had been providing a very nice way to invest money and pay off a mortgage while also supplying the necessary life assurance cover expected by the lender on the loan. The fact that most of them also paid out considerable cash lump sums on maturity was their real attraction. The reason they stopped paying out so much was that their investment funds performance on the world’s money markets changed.
From the nineteen eighties, right up to today, the life assurance companies themselves were suffering under immense over-kill legislation from various Financial Services Acts that have decimated the industry. The legislation introduced and still maintained today by the FSA in its golden tower at Canary Wharf in London, is rather like using a tactical nuclear missile to swat an irritating fly buzzing in your kitchen.
The legislation was introduced to eradicate mis-selling by a few irresponsible life assurance salesmen that were inevitably in existence. We believe it is true, although it might only be a myth, that there are now more people employed in the FSA than there are actually registered and qualified as financial advisers.
But we digress; one of the benefits of having an endowment arises when you are having a period of financial trouble. Yes, you could approach finance companies for a standard personal loan, or you could borrow on your credit card, but you might also be able to borrow against your endowment.
When you take out an endowment, that policy will be assigned either to the life assurance company or to you. We understand that it should actually be assigned to you so that when the policy matures at the end of its term the finances resulting from that policy will be paid to you straight away. If the policy is assigned to the company then they are paid to the company and you will be left wondering where your supposed funds are.
This practice can earn financial services companies millions each year as huge sums sit earning daily interest until policy holders work out what has happened and ask fro their money to be paid to them.
Assigned to you
Assuming the policy is assigned to you and that it has been in force for some years and therefore amassed a reasonable sized fund then the life assurance company will lend you that money usually at a reasonable interest rate, but the good thing is they won’t expect you to repay the capital straight away.
With this facility you can regard it like a mortgage, although it isn’t one. You can repay just the interest and depending on the lender they may allow you to continue just paying the interest for a long, long time. After all they aren’t bothered, they are making money from you but the benefit to you is that it is a cheap way to borrow quite large lumps of money for the short term.
Where it all goes pear-shaped is if you keep that loan for a long period of time before paying it back, you will end up paying many times the amount of the loan in the first place. Then it’s clearly not very sensible.
But those endowments can offer a lot more that you might have first thought.
It’ll be interesting to see when they return to favour.