Endowment mortgages sold for £1,000s too little
Tuesday, 27 Jun 2006 12:35
Endowment mortgage holders could be missing-out on £1,000s by cashing in their policy
By selling endowment policies back to the provider, mortgage holders are missing out on thousands of pounds.
While the endowment mortgage mis-selling scandal has been well publicised, what is less well known is that people have a choice when it comes to cashing in their policy.
After a compensation claim has been settled, mortgage holders have a series of options.
They can take their compensation cheque, and leave their policy in place; they can cash in their policy and move their money elsewhere; or they can sell their policy on the open market.
Of these options, the second is the most common - but also potentially the worst value.
Some 55 per cent of claimants simply cash in their policy by selling it back to their pre-existing provider, data from claims company First Endowment reveals.
"Not only have these homeowners faced an uphill struggle to get compensation for mis-sold policies, but significant numbers of our customers have lost out a second time around by not exploring the options of trading their policy on the open market," said First Endowment managing director John Williams.
"Once an endowment compensation claim has been settled it is then up to the client who they sell the policy to, assuming they want to offload it.
"But those who do face typical losses of around £2,000 on a £50,000 policy, which is a lot of money in the scheme of things.
"We would always advise trawling the market for a quote: many policies have performed so badly that traded endowment companies will not quote at all, but some of the better performing products are still attracting a premium."
There are approximately 6.5 million endowment policies in the UK.
Many of these were sold alongside an interest-only mortgage. The principle was that the endowment policy would mature and pay off the mortgage debt after a set period.
However, growth has been less impressive than many predicted, leading to 85 per cent of these policies not being 'on target' to reach the sum needed to cover the mortgage, data from First Endowment shows, with many not worth as much as the premiums paid into them.
If this risk was not fully explained at the time the endowment mortgage was sold, then policyholders are entitled to compensation.
This will typically make up the difference between the current level of the fund, and where the customer would be if they had paid into a more typical repayment mortgage instead of an endowment policy.
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