Fergus considers mortgage options

Fergus answers money questions on Reporting Scotland and online

I'm Fergus Muirhead and I'm trying to answer any money or consumer problems you may be facing at the moment.

You can contact me by e-mail at fergus@bbc.co.uk

I will deal with a selection of your e-mails every second Monday on lunchtime Reporting Scotland, Scotland Live and on the BBC Scotland news website.

Q. I saw you on the news tonight and you asked people to get in touch regarding their endowments. I have made nothing on mine since I took it out in 1995 and it feels as if I am only putting the money in the bank at the end of the day. I pay �85 a month, which is a lot from my income but I have been scared to cash it in as it's my life cover too, although I have recently been shopping around for life insurance. Margaret McQueen

The important point you make here Margaret, is that your policy also contains valuable Life Insurance. You don't say how much cover you have with your endowment but it should be possible to arrange it elsewhere for less money that you are currently paying and if you are unhappy with the way your endowment is performing then that is perhaps what you should look to do. Be careful, however, if the life insurance element is still important, that your health hasn't changed since you bought your endowment, and check that you can still buy cover, and check how much it is likely to cost you, before cashing in your endowment.

Q. I am wondering if you can clear up a matter of endowment policies for me. I have been getting annoyed at references to endowment policies not providing sufficient funds at maturity to clear the related mortgage. I have always understood that if a borrower with a �50,000 mortgage takes out a �50,000 endowment policy it will repay the mortgage at maturity or on his earlier death plus hopefully give him some additional bonus.

My thoughts are that what is being referred to is the borrower taking out a 'low cost' endowment for �40,000 plus a term policy to give life cover for the uninsured �10,000 and looking for the endowment bonuses to cover the remaining �10,000 cash repayment at maturity. I think that borrowers are aware that they are taking out a cheaper premium option with no guarantees of bonuses and that commentators should be using the term 'low cost endowment' when referring to shortfall.

The reference 'shortfall' being applied to endowments is widespread and I am wondering if my understanding requires correction. Norman Thomson.

The questions you raise are at the heart of the problems people have had with 'low cost' endowments. As you rightly say the initial 'sum assured' would be much less than the amount that was needed to cover any loan, with the difference being made up with bonuses over the term of the policy. These bonuses would have been dependent, to one extent or another, on the growth of underlying investments and if the actual growth was less, as was often the case, then there would have been a shortfall.

Some people did have endowments where the initial 'sum assured' was in fact equal to the amount borrowed but as you say this was a more expensive option although it was the only way to guarantee that you would end up with enough money at maturity to repay your loan.

To make things more complicated some insurers then introduced a 'low start, low cost endowment', where not only was the initial sum assured lower at the beginning but the premium increased for the first few years of the policy as well.

Q. My husband and I took out a 30-year endowment policy with Standard Life in January 1983. It appears to be a mortgage repayment joint life plan - an endowment assurance with profits and minimum death benefit. It is not the easiest document to comprehend but states that the sum assured is �3,100 but then states the policy will be written under the company's Low Cost plan (this looks like it will give �10,000 mortgage repayment) which states that should death occur with the 30 years the amount will be �10,000 or endowment plus bonuses whichever is greater. A note on the original quote states today a special claims bonus of �5,304 would be payable.

We are totally confused as to what all the different figures actually mean especially when compared to last year's March '08 statement which states:

Sum assured

� 3,100.00

Bonuses - this year

� 27.52

Previous years

� 3,950.05

Total

� 3,977.57

Min amount we will pay at maturity - � 7,077.57

My main query is if we both live beyond the exit date 2013, will we not receive �10,000 to repay the part of our mortgage we sought to cover in the first place? Would that only happen if one of us died when we would then receive �10,000 plus the �7,077 in bonuses - is my understanding here correct? I hope you can help shed some light on this and await your response. Faye and Andrew Hogg

This is a good practical example of the response to the last question. In your case the initial sum assured is �3,100 and the policy has been projected to produce �10,000 at maturity. At the moment the bonuses for previous years are �3950 which, when added to the initial �3,100 and this years bonus of �25 makes the current value of �7,077. It is this amount that is likely to be paid if you cashed the plan in today, but the full �10,000 would be paid out if either of you died today. Without seeing the policy document I can't comment on the 'special bonus' but my understanding of these policies in general is that if �10,000 is the minimum death benefit then that is all that will be paid out until the 'actual value' is more than this figure due to bonuses. I hope this makes sense!

Q. I have an endowment policy with Prudential Insurance which is due to pay out �27,700 in May 2012. I have been told that it is currently under performing and that 2 years ago it was going to be �11,000 short. I dread to think what will happen now. I have been living in hope - is there anything I can do? Susan McKay

If you still need the money from the endowment to repay a mortgage that is set up on an interest only basis then there are a number of things you could do. You could arrange for some other savings, for example money you have already built up in other investments (or have in the bank) to be used to make up the shortfall when you are due to repay your mortgage. If you don't have any other savings at the moment then you could arrange to put aside some money regularly to help make up the difference.

You could ask your lender to convert the loan to a repayment mortgage which means that you would be making capital payments as well as interest every month and so, if the figures are worked out properly, your mortgage would be �11,000 less in 2012.

If all of these options are too expensive at the moment then you could just keep paying interest on your loan after 2012 and perhaps expend the term of the endowment if this is possible until it makes up the difference.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.