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Thousands facing a mortgage timebomb

Nine out of 10 endowments could fail to earn enough money to pay off homes

By Claire McNeilly

Thousands of homeowners in Northern Ireland are facing massive mortgage payment shortfalls, financial experts have warned. Some householders who took out endowment policies when they bought their properties could even be forced to sell up because of the stock market slump.

Analysts have said that older people who are no longer working and have limited savings may be forced out of their homes after the value of policies plummeted.

It is estimated that up to 10,000 endowment polices will mature in Northern Ireland between now and 2015, with a staggering 99% of those expected to miss their target maturity payout.

Joe Maxwell, financial adviser at Belfast firm Maxwell McKeown, said householders could be facing a mortgage timebomb.

“We would estimate that tens of thousands of people could be affected,” he said. “It could leave a lot of homeowners in a very precarious situation when it’s time to redeem the mortgage. It could lead to repossessions for people who don’t have savings, or those who can’t be transferred over to a reasonable repayment term.

“In the worst case scenario, some people could even find themselves homeless.”

Mr Maxwell added: “Elderly people are probably most vulnerable because the mortgage lender possibly will not be able to increase their mortgage term.”

Endowment sales were particularly popular from 1988 to 1993, when up to four in every five UK homebuyers purchased one.

Many borrowers were attracted by the promise of reaping a return in excess of £100,000, just for saving a mere £50 a month.

But since the beginning of 2000, payouts on typical 25-year policies have plunged to as little as £30,000. In 2008, the findings of a report quoted an average shortfall of £7,200 — but experts claim that has risen to £10,000 today.

Citizens Advice Money Advice project manager Scott Kennerley said this is yet another bad news story for Northern Ireland.

“Our Dealing with Debt service is continuing to experience high levels of demand,” he said. “The effects of the recent recession and the downturn in the economy are continuing to impact on people experiencing financial difficulties.

“This problem of poor performing endowment policies is an added burden that will no doubt result in more people seeking advice on how to deal with debt.”

Financial Services Authority (FSA) predictions suggest as many as 100,000 UK policies face a £20,000 shortfall.

Last week Prudential, one of the strongest with-profits companies, revealed that its payout on a benchmark 25-year, £50-a-month policy maturing in February was £35,834 — down in just 12 months from £37,738.

Prudential now estimates that 75% of its endowment policies will miss their target payouts on maturity. Last year it said just 25% would fail, while that figure was even lower, at 19%, in 2008.

There were once 11 million mortgage endowments but many have matured or have been cashed in, leaving 4.9 million still active.

Kenneth Burtney, independent financial adviser with Ballynahinch-based KB Financial Planning, said: “When endowments were in their heyday, interest rates were high, stock markets buoyant and life offices issued policies on the assumption that annual returns of 7%-9% were reasonable. But this has proven not to be the case, leaving some endowments falling short of their target.

“For any policyholder who has received a letter from their endowment company warning them of a potential shortfall it is important that they do not bury their head in the sand and hope the problem goes away. Steps can be taken now to address the shortfall, for example re-structuring their mortgage to put the shortfall amount or the whole mortgage balance on to a repayment basis.

“There is a possibility, of course, that interest rates could rise again in the future and bring with it higher annual bonus rates enough to possibly to repay the target amount. However, no-one can reliably predict what will happen in the future. My advice is that if you have any concerns about your endowment speak to your local independent financial adviser.”

Factfile

An endowment mortgage combines an interest-only mortgage and an investment.

Throughout the mortgage term interest is paid on |the amount borrowed to your mortgage lender and |a monthly premium is |paid on your endowment policy.

The endowment premiums are invested with the intention that the endowment produces enough capital at the end of the term to pay off the mortgage.

If your endowment policy won't reach this target you will have a shortfall and will need to pay part of the capital owed on your mortgage another way.

Case studies

‘NOBODY THOUGHT THERE WOULD BE SUCH BAD SHORTFALLS’

When Ballymena man Johnny Kerr married his fiancée Marian 22 years ago they moved out of rented accommodation into their first home.

“It was a big investment for us — around £100,000, which at that time got you a really good four-bedroom detached property with garden on the outskirts of town,” recalled Mr Kerr.

“Endowment mortgages seemed to be all the rage back then and you could understand why. They would pay off your loan and leave you with a nice lump sum for your later years. We thought ‘what could go wrong?’”

What did go wrong was the endowment policy, which is due to mature in just over three years’ time — will get nowhere near clearing the debt, let alone providing a nest-egg for the Kerrs.

“When we last checked, just before Christmas last year, its value was around £40,000,” said Johnny. “That’s only slightly more than the amount we’ve invested in the last 22 years.”

He added: “I know the small print says that the value of investments can go down as well as up, but when we bought our house it was the era of the ‘yuppie’ and (the Prime Minister) Margaret Thatcher was promising great things for a Britain of home owners. Nobody really thought at the time there’d be such shortfalls.”

Johnny started having severe doubts about his endowment policy a few years back, but decided to stick with it in the hope that the financial climate would improve enough for him to at least break even.

“There wasn’t much of a choice for us,” he said.

“Cashing in the policy wasn’t an option because the surrender value wasn’t worth a damn.

“The one consolation we have is that the house is worth so much more than we paid for it back then... but a lot less than we could have sold it for a couple of years back when Northern Ireland was in the middle of a once-in-a-lifetime property boom.”

The Kerrs say they will probably have to borrow around £45,000 to pay off the shortfall — starting another long-term mortgage at a time in their lives when they believed that monkey would be off their backs forever.

'I HAD NO CHOICEBUT TO DOUBLE MONTHLY PAYMENTS'

Joanne Sweeney is one of the fortunate local endowment policy holders who is still on track to cover her remaining mortgage.

Her Zurich, formerly Eagle Star, endowment policy of £30,000 is due to mature in November 2012 — and it appears to be on track, at least to cover the mortgage sum.

The senior pubic relations consultant first heard of endowment policies when she arranged the mortgage from the Halifax Building Society for the purchase of her first home in the mid 1980s.

“When I bought my first home I accepted the recommendation to go the low cost endowment mortgage route as everyone else seemed to be doing so,” she said.

“When I moved into a larger home, the endowment was increased to just over £30,000, the endowment was paid and viewed just as part of the mortgage.

“For a time it was agreed that we would opt to start to repay some of the capital as the monthly premium kept being increased.

“I recall finding out that because we not increased the monthly premium in line with the company’s recommendations, they would no longer guarantee to pay out the full sum on maturity.”

Therefore, when Ms Sweeney took over the mortgage and the endowment about eight years ago, she claimed she had no choice but to practically double her monthly payments. “A couple of years ago it looked like I would get a nice little bonus payment but now, as long as I can repay my mortgage, I’ll be happy,” she said.

“I do remember receiving several red warning letters. My last one said my plan was on track but the wording was in red.”

But she added: “I think I’ll be double-checking with the company in the light of this latest warning.”

Analysis

Limited options for homeowners caught in the trap

By Stephen Hill

Endowment policies were sold at their height to people in Northern Ireland and throughout the UK from 1987 and this latest development is a reminder to everyone to expect volatility from any stock market linked investment.

This isn’t the first time that there have been this shortfall scare for policyholders and, depending on future stock market performance, it may not be the last.

There were shortfall warnings in 1987, early 1990s and here we are again.

There are virtually no endowment policy products that I know of on the market now and I would say that they were last sold in any type of numbers in the mid-Nineties.

While it is impossible to say how many people in Northern Ireland would still have endowments, the average profile of remaining endowment holders would be people in their forties and fifties as endowments have not really been marketed to the younger home owner.

This will undoubtedly impact on people in Northern Ireland and it’s coming at a time when most are thinking they are so close to owning their own home outright.

The thought of being ‘mortgage-free’ is a major, psychological milestone for people, particularly for Northern Ireland homeowners.

I can fully understand how this latest scare will be upsetting taken into account along with local property values decreasing over the last 18 months.

We would be currently advising homeowners to consider taking out a separate life term assurance policy to cover the mortgage in the event of death while maximising their savings potential in an ISA.

There is no other option for local people caught in the endowment trap to making up the shortfall than to save more and make alternative provision.

And while increasing your monthly payment may seem the easiest way of making up the shortfall, it would be prudent to seek financial help to see if there is a better way to make sure that you have capital to clear your mortgage.

Unfortunately the days of being able to buy any financial product from one company and keep paying into it for 25 years until it matures is not recommended.

People need to be aware that they have to continually review their financial products to make sure that they are performing, and if they’re not, be prepared to switch.

Stephen Hill is an independent financial adviser with S Hill & Co Investment Advisors

Factfile

Between 5,000 and 10,000 mortgage holders in Northern Ireland are unable to clear their mortgage at the end of the term. If this |happens, householders can:

(1) Change to a repayment mortgage, extending the term to keep payouts down.

(2) Use savings to clear |outstanding amounts.

(3) If you are retired there is the option of equity release.

(4) Sell and clear outstanding debt.

(Source: Maxwell McKeown)

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