Your endowment and your mortgage

Transcription

1 Your endowment and your mortgage

2 Helping you understand If you have an endowment mortgage you may be concerned about whether your endowment policy will provide sufficient money to repay your mortgage when it finishes. This information explains the options available to you, to help you decide what action, if any, to take to reduce your potential shortfall.

3 1 How to use this information If you want to learn about: The background to endowment policies Refer to page 2 Why your endowment might not be sufficient to repay your mortgage Other methods of repaying a mortgage Refer to page 3 Options for your endowment policy including Refer to page 4 Considering surrendering your policy Selling your policy Your basic options at a glance Refer to page 6 Deciding what s right for you. Refer to page 7 If you already know what you want to do with your endowment and mortgage - go straight to the section for you: Interest-only options Refer to page 8 Mixed Mortgage Options (Interest-only and repayment mixed) Refer to page 9 Repayment Mortgage Option Refer to page 10 How to contact us Refer to page 11 If you have reached the end of your mortgage and have a shortfall Refer to page 12 Important Information Refer to page 13

4 2 The background to endowment policies An endowment mortgage is a mortgage loan combined with one or more savings schemes called endowment policies. Endowment policies are purchased from an insurance company. For the part of your mortgage that is supported by your endowment(s), you only pay the interest and do not repay any of the capital until the end of the mortgage loan. The loan itself is intended to be repaid by the proceeds from the endowment(s) at the maturity date of the policy. Endowment policies are typically invested on the stock market in bonds, shares and property. There are two types of endowment policy and both types contain life cover of a guaranteed minimum amount. Full with-profit endowment policies where the amount the endowment company will pay out is guaranteed to be at least equal to the target amount. Low-cost endowment policies where the amount paid is not guaranteed to be at least equal to the target amount (except on death). When a low-cost endowment policy matures the intention is that the investment return will be sufficient to repay the amount that is linked to the mortgage. There are two distinct types of low-cost endowments, with profits and unit-linked. A low-cost with-profits endowment contains a minimum guaranteed payment on maturity, which will be a proportion of the target amount, while a low-cost unit-linked endowment does not contain any guarantee as to the final amount paid out. Why your endowment might not be sufficient to repay your mortgage Over recent years the amounts expected to pay out on endowment policies have fallen due to poor stock market performance. This means that some endowment policies are now predicted to fall short and will not pay off the amount of mortgage they were expected to. Not everyone faces a shortfall. Your life assurance company will send you details of how your policy is expected to perform at least every two years, along with a factsheet from the regulator, the Financial Services Authority. This is what you should use to find out whether you have a potential shortfall on your mortgage. Your re-projection letter is a guide as to how your policy may perform over the next few years your policy may perform better or worse than the letter says. Your letter may be coded green, amber or red. Green means your policy is on track and likely to repay its target amount, amber means there is a risk that there may be a shortfall and red means that there is a high risk that your policy may not reach its target amount. If you are worried about your endowment mortgage don t make any hasty decisions. Consider the questions and key points within this information to help you decide the best course of action for you and your mortgage. Once you have decided what you want to do, let us know so we can amend your mortgage, if appropriate.

5 3 Other methods of repaying a mortgage Repayment Mortgage A repayment mortgage means that each monthly mortgage payment made pays off both interest and part of the loan. This means that at the end of the mortgage term, as long as all payments have been made on time, the full loan will have been repaid. There are no savings schemes with this method of repaying the mortgage, although in most instances life insurance cover is recommended. This is an option you could change to if you wish to change the way your mortgage is repaid. Mixed Repayment Methods A mortgage can be taken on a part interest-only and part repayment basis. This differs from the Repayment Mortgage (detailed above) because the interest-only part of the loan will be linked to a savings scheme to repay the loan and the remainder will be repaid directly from the monthly mortgage payment. This is another option you could change to if you wish to change the way your mortgage is repaid.

6 4 Options for your endowment policy: There are five basic options for your endowment policy: 1. Keep your policy and the life cover it provides, keep paying your premiums and use it to continue to support your mortgage. Any potential shortfall will need to be made up from one of a variety of methods all explained in this information. 2. Keep your policy and the life cover it provides, keep paying your premiums and use it as a savings scheme but not to support your mortgage. Your mortgage will need to be transferred onto a repayment basis, which will increase your monthly mortgage payment. 3. Keep your policy, stop paying the premiums and leave your funds with your insurance company until maturity - making your policy paid up. You can then either use the reduced maturity value and life cover to support your mortgage and change your mortgage onto a part repayment basis, or keep your policy as a savings scheme and transfer your mortgage to a full repayment mortgage, both of which will increase your monthly mortgage payment. 4. Surrender your policy and transfer your mortgage onto a repayment basis, which will increase your monthly payment. The downside of this approach is that, in surrendering your plan, you also lose the life cover provided, which can be a very important consideration, especially if your health has deteriorated since you originally took out the policy. 5. Sell your policy and transfer your mortgage onto a repayment basis, which will increase your monthly payment. This has the same issue as surrendering your plan you lose the life cover benefit provided. Considering surrendering your policy You could decide to stop your endowment policy or cash it in. You should think carefully before taking any action as it could leave you and your family worse off. If you have a relatively new plan, the cash-in value may be less than you ve paid in and stopping the plan may leave you and your family without the benefit of life cover and potential for future bonuses you once had. And, you could be liable for tax on the amount, if any, by which the value of the plan exceeds the value of the premiums you ve paid. If you don t keep your plan, you could lose out on yearly bonuses or money paid to you when the plan ends. You could also be worse off, especially if you cancel your plan prematurely, because the cash-in value may be low or not worth anything at all in the early stages. If you are considering replacing your plan, you may have to pay more for the same level of life protection, as you ll be older or your health may not be as good which in some cases may mean that you won t be able to get replacement cover. So it s important to consider all aspects, as you might not be able to get the same level of protection you re giving up. If you do decide to take out a new plan, it s important not to cancel the old plan before the new plan starts as you would be left without any life cover at all. You should also consider whether a new plan has the same benefits as you had before. If you do decide to surrender your policy you should use any proceeds to reduce the size of your mortgage, which will reduce the interest payable.

7 5 Selling your policy to a third party Selling your endowment policy to a third party can sometimes be more beneficial than cashing it in. But if you do want to look at this option, it s mainly available for with-profits plans, which have been running for at least five years. Because with-profits plans are long-term investments and attract bonuses, many people are willing to buy them second-hand. That means you may be able to sell your plan for more than the cash-in value. The Association of Policy Market Makers, represents a number of the biggest firms in the market. If you are considering selling your plan you can contact them at: Association of Policy Market Makers The Holywell Centre 1 Phipp Street London EC24 4PS Or look on their web site There is a limited market for the sale of unit-linked endowment plans. For further information please contact IFA promotions on or alternatively, you may wish to refer to the financial pages of the National Press. If you do decide to sell your policy you should use any proceeds to reduce the size of your mortgage, which will reduce the interest payable.

8 6 If you are facing a potential endowment shortfall these are your basic options at a glance... Keep your policy and keep paying your premiums 1. l Support your mortgage with the reduced re-projection amount of your policy. l Make up the potential shortfall element from using one of the methods outlined in this information. 2. l Use your endowment policy for savings. l Keep your life cover. l Change your mortgage to repayment. Where there is a risk that your endowment policy will not pay out the full amount needed to repay your mortgage at the end of your mortgage term Keep your policy and stop paying your premiums 3. l Your policy becomes paid up. l It provides reduced levels of maturity value and possibly life cover check with your endowment provider. l Use the reduced amount to support your mortgage. l Make up the potential shortfall element from one of the methods outlined in this information. l Take out additional life cover if needed. We recommend you have life cover in most cases. Give up your policy and the life cover it provides sell or surrender 4. l Surrender your policy l Pay the money into your mortgage l Change your mortgage to repayment l Take out replacement life cover if needed. We recommend you have life cover in most cases. 5. l Sell your policy l Pay the money into your mortgage l Change your mortgage to repayment l Take out replacement life cover if needed. We recommend you have life cover in most cases.

9 7 Deciding what s right for you, if you are facing a potential endowment shortfall... Follow these questions through to take you to the right option for you and turn to the following pages for more information Do you want to take action to limit the potential shortfall on your mortgage? Yes No I want to wait and see what happens to my policy. Understand the implications of your choice Your policy may continue to under perform which means that you may not be able to fully repay your mortgage at the end of the term. Your policy may recover by a sufficient amount to repay your mortgage. Your policy may further under perform causing your potential shortfall to increase. If this happens you will have a larger shortfall to make up on your mortgage. If you choose not to take action now, we recommend you review your situation regularly. Would you prefer to guarantee to repay your mortgage and not to use the proceeds of your endowment policy to repay your mortgage? Yes Repayment Mortgage Option For you, if you no longer want to rely on your endowment policy to repay the mortgage. This will increase your outgoings because your monthly mortgage payments will need to go up to repay the loan as well as the interest, but will give you peace of mind. No Are you happy to continue to pay into a plan that invests in stock market linked investments and/or keep your full mortgage as an interest only loan? Yes Interest-Only Options For you, if you want to keep your mortgage as interest-only and are happy to continue on the same basis. You may wish to consider increasing the amount you pay into your plan but you ll need to check with your endowment provider if this can be done and what charges would apply. Do you have savings you would like to use to pay off your mortgage loan? This would reduce the amount your endowment policy will need to repay. No Yes you can choose between Interest-Only Options For you, if you can reduce your mortgage by the potential shortfall amount and want to continue with your endowment policy. OR Mixed Mortgage Options (Interest-Only and Repayment) For you if you want to continue with your endowment policy but cannot reduce the amount of mortgage by the full shortfall amount. Would you prefer to increase your monthly mortgage payment to reduce the loan more quickly? Yes Mixed Mortgage Options (Interest-Only and Repayment) For you, if you want to continue with your endowment policy but reduce the amount of mortgage it needs to repay at the end of its term. No Would you like to consider extending your mortgage term? Take care if this would take you into your retirement. Yes you can choose between Interest-Only Options For you, if want to continue with your endowment policy for longer and increase its potential to pay more at the end of the term. This may be dependent upon the policy conditions, and you need to check with your endowment provider if it can be done without giving rise to a tax liability on the final maturity proceeds. OR Mixed Mortgage Options (Interest-Only and Repayment) For you if you want to keep your monthly payments the same but reduce the shortfall by paying more over the longer term. Remember with either choice you need to be sure you can make the necessary payments if you take your mortgage into your retirement.

10 8 Interest-Only Options You could increase your premiums to your endowment policy. l This will increase the amount your policy is likely to pay out. l If you have ten years or less to run this may not be an option available to you as there may be a tax implication. Key point: The growth of your endowment policy is still not guaranteed to reach its target amount by paying more money into it. The shorter the term you have left the less time there is for growth. Key question: Are you happy to increase your investment into your endowment policy where the additional investments may or may not increase the value of your policy sufficiently to repay your mortgage? Action: Speak to your endowment company to arrange an increase in payment. You could arrange for your endowment policy term and mortgage term to be extended. l This option works by giving you more time to pay off your mortgage by making more payments into both your policy and mortgage. l You will pay more interest on your mortgage over the extended term. l It is not a good idea to extend into your retirement unless you are sure you can afford it. l You may face extra charges and tax liability speak to your endowment company. Key point: The growth of your endowment policy is still not guaranteed to reach its target amount by paying more money into it. Key question: Are you happy to extend the term of your mortgage and endowment policy making more payments for longer, bearing in mind your endowment policy is still not guaranteed to reach its target amount within the extended term? Action: Speak to us to extend your mortgage term and your endowment company to find out whether you can extend your policy You could take an additional endowment or a savings plan such as a Stocks and Shares ISA. l You may pay set up charges at the start of a new policy, although some companies do not make initial charges. l These are longer-term solutions and not suitable if you have five years or less to run on your mortgage. Key point: The value can go down as well as up and you may get back less than you invest. Key question: Are you happy to take an additional repayment plan, with possible set up charges and which is not guaranteed to reach its target amount? Action: Speak to a Financial Adviser. You could save in a savings account, which is not linked to the stock market. l This is a safer option, as your capital is secure and the amount you save, plus interest, can be used to repay part of your mortgage. l Taxpayers could avoid tax by saving into a Cash ISA. l You will need to use the money in your savings account to pay into your mortgage. Key point: A potentially safer option but it may be better value for money to consider paying this money directly into your mortgage, as mortgage interest rates are generally higher than savings accounts, and this would also avoid the tax implications of a savings account. Key question: Would you prefer to save into a separate savings account and pay the money into your mortgage when needed, bearing in mind you will normally pay more interest on your mortgage than you would earn on your savings account? Action: Contact our investment helpline on *

11 9 Mixed Mortgage Options (Interest-Only and Repayment) You could repay some of your mortgage from other savings/investments/sale of shares. l This option reduces the amount of mortgage your endowment needs to repay. l This would have a positive impact on your mortgage. Your monthly mortgage payment could be reduced or you could continue to pay the same amount and pay your mortgage off faster. It is not advisable to use all your savings keep some for emergencies. Key point: This would have a positive impact on your mortgage reducing both the monthly mortgage payment and interest you pay over the remaining term of the mortgage. Key question: Do you have savings elsewhere that you could use to pay into your mortgage? Bear in mind any loss of interest or life cover you may incur by cashing in savings early. Action: Speak to our Mortgage Contact Centre on *; a staff member will arrange a new monthly mortgage payment. You could pay more each month. l This option reduces your mortgage over time, reducing the amount your endowment needs to repay. l This option could be better than saving up in a separate savings account as the overpayments immediately reduce your mortgage. The interest saved on the mortgage may well be more than the interest earned in the savings account. Key point: This would have a positive impact on your mortgage by slowly reducing the debt outstanding and interest you will pay. Key question: Would you prefer to pay more on an informal basis by whatever you can afford to? Action: Speak to our Mortgage Contact Centre on *, who can make the arrangements for you. You could change part of your mortgage to a repayment basis. l This option will increase your monthly mortgage payment but also reduces the amount your endowment policy needs to repay. l Guaranteed to reduce your mortgage by the amount you change to repayment as long as you keep up with your payments. Key point: This option guarantees to repay the amount transferred to repayment. Key question: Would you prefer to ensure to reduce your mortgage, (for example by the amount of your shortfall) by transferring part of your loan to repayment? Your monthly payment will increase we will tell you how much by. Action: Speak to our Mortgage Contact Centre on *, who can make the arrangements for you and arrange for a new monthly mortgage payment.

12 10 Repayment Mortgage Option You could transfer your whole mortgage to a repayment mortgage. This would mean the proceeds of your endowment would not be needed to repay your mortgage. l Your monthly mortgage payment will increase - the longer your mortgage has to run, the less the increase will be. l Your outstanding mortgage balance will reduce over time. l You may want to consider additional life cover if you choose not to keep your endowment policy see pages 4 & 5 for more information. Key point: Your mortgage is guaranteed to be repaid - providing you keep up your monthly mortgage payments. Key question: Would you prefer to take away all reliance on the endowment policy to repay your mortgage? Bear in mind that your monthly mortgage payment will increase and you will need to consider what to do with your endowment policy and life cover. Action: Speak to our Mortgage Contact Centre on *, who can change your mortgage to a repayment basis

13 11 Summary: If you face a potential shortfall, you need to set more money aside now to put into repaying your mortgage in one form or another. The sooner you start paying in more, via your chosen method, the smaller your potential shortfall is likely to be. Even if you can t afford to make up the entire projected shortfall, it s better to do something rather than nothing. If you have a number of debts and the costs of paying these means you cannot afford to take action on your mortgage talk to us. We may be able to help by consolidating your debts and reduce the monthly cost. This means you could have more money available to reduce your endowment shortfall and still be able to meet your other commitments. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage. The decision as to what you choose to do is entirely your own. We can help by reviewing your mortgage and what impact your chosen method might have. Please ask us about anything you do not understand - if we can provide factual information to help you make your decision we will. If you have any questions relating to your endowment polices then please contact your endowment provider. If after considering your options, you still feel that you need further guidance you should contact an Independent Financial Adviser. Contact us If you want to discuss your mortgage you can contact us by: l Calling The Mortgage Contact Centre on Lines are open Monday to Friday 8am 8pm, and Saturday 9am 1pm. l Visiting our website: Calls may be monitored and recorded for security and training purposes. If you re calling from outside the UK, please dial

14 12 Are you at the end of your mortgage with a shortfall? If you get to the end of your mortgage and you have a shortfall the first thing to do is pay all the proceeds from all your endowment polices into your mortgage to reduce the outstanding amount and establish exactly what your shortfall is. The next thing is to look at a suitable way for you to repay your shortfall. Your options are: l Repay your shortfall from funds you may hold elsewhere. l Continue with the shortfall amount as a mortgage on a repayment basis this could be at the same monthly mortgage payment to pay your mortgage off quickly or we can negotiate a lower payment so you pay it off over a number of years suitable to you. l Providing your mortgage has not been in arrears within the last six months and you keep up the new agreed mortgage payments, we can reassure you that you will not lose your home as a result of your shortfall. l We will discuss with you the most appropriate products from our range and see whether we can find another mortgage product to help keep your mortgage payments as small as possible.

15 13 Important information Peace of Mind If you have reached the end of your mortgage term and have a shortfall on your mortgage following the payment of the proceeds from the maturity of your endowment policy into your mortgage, we will not repossess your home subject to the following: l We (you and Birmingham Midshires) agree sensible and affordable repayments incorporating an extension to your mortgage term suitable to you. l You keep up the new repayments we agree. l Your mortgage has not been in arrears within the last six months. l Your endowment policy covered at least the interest-only part of the mortgage and your policy payments were kept up to date.. General Points We will allow you to change the basis on which your mortgage is conducted by allowing you to transfer to a part repayment or full repayment basis. There is no charge for this. For many of the options detailed in this information your monthly payments will increase. If you are extending your mortgage term into retirement make sure you can continue to afford the mortgage payments. We may ask for evidence of retirement income in these circumstances.

16 PO Box 81, Pendeford Business Park, Wobaston Road, Wolverhampton WV9 5HZ Website: Birmingham Midshires is a division of Bank of Scotland plc. Registered in Scotland No. SC Registered Office: The Mound, Edinburgh EH1 1YZ May 2012