Mortgage Endowment Pay-Outs Down Again
Mortgage endowments were very popular in the late 1980s and early 1990s, being sold on the belief of doubtful figures and promises to homebuyers. Unfortunately most of the financial salesmen of the time had their own commissions in mind rather than the future welfare of their clients.
Financial advisers and insurance companies made a bundle of money, but some homeowners have been left short of enough money to pay off their mortgage, and many will be in the same boat for years to come.
The latest set of figures from Norwich Union show how it is. All mortgage endowment pay-outs are down this year - by up to 10%.Yet, the stock market has had five good years and funds have seen good gains. The sad facts are that 90% of homeowners with a Norwich Union mortgage endowment policy will not have enough money to pay off their capital mortgage loan.
Despite the bad news from Norwich Union, the even worse news is that it actually has one of the strongest with-profits records. Therefore results from other insurance companies will be lower.
Norwich Union also runs the old Commercial Union and General Accident policies. The insurer says nine out of ten of its mortgage endowments will not cover the loan when they mature.
In 2008 69,000 policies will mature, and Norwich Union expects half to show a shortfall. Last year the average shortfall was £1,470, but this was cut in half thanks to the company’s mortgage 'promise', introduced in 2000. Under the scheme, Norwich Union assists some policyholders in reducing the shortfall.
Savers with a Commercial Union policy who put in £50 a month for 25 years from 1 January 1983, (from age 29) will receive a mere £39,321. This is a huge 10% down on the £43,697 paid out on a 25-year plan taken out in 1 January 1982, only 12 months earlier. The fall is partly explained by the fact that the company made its policies more expensive for new savers in 1982.
Worse, the latest pay-out is 19.6% down on the £48,889 paid out just two years ago.
The fall comes even though the £16 billion fund in which these policies are invested actually grew by 5.4% last year and 11.7% in 2006.
Those with plans with Norwich Union and General Accident should also expect to see lower payouts this year. Norwich Union will pay £39,357, 6.6% down on the previous year, while at General Accident it's £45,911, down 2%.
Norwich Union's figures mean bad news for with-profit policyholders with other companies whose policies are likely to fare even worse. Norwich Union's policies invest in shares and property more than most others do, and these investments usually give better returns than bonds over a longer term.
Norwich Union has 18% in property and 53% in shares, and has put aside £21m for mortgage shortfalls on endowments for this year.
Pay-outs at Friends Provident have also fallen. Its with-profits fund made a 5% return last year. A 25-year savings endowment policy at £50 a month maturing in 2008 at £36,425 is 3% down on a similar policy last year.
Published on January 22, 2008
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