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If your endowment policy doesn't produce a large enough lump sum to pay what you owe your lender, you will need to make up the difference. However, you may be entitled to compensation if you got bad advice from the company that sold you the policy.
How the shortfall develops The success of any endowment policy is linked to the stock market, and will vary from year to year. There are risks involved in any investment that is linked to the stock market. Endowment policies that were taken out when interest rates were high (between 10% and 12%) were issued on the assumption that the policies would earn between 7% and 9% each year. However, when interest rates fall (for example to 5% or 6%), there is an increased risk the policy will not earn as much as was predicted. However, there is always a possibility that interest rates will rise again in future. In the long term your endowment policy could still earn enough to repay your mortgage. However, no one can predict what will happen in future. If you are not happy with the risks involved, you should get advice. Back to top
What can I do? If you have been told that your endowment policy may not cover the outstanding capital at the end of your mortgage, you may be able to make a complaint and get compensation . Check out all your options and get independent financial advice before you make any decisions. If this isn't successful, you can take steps to ensure your mortgage will be paid off. Back to top
Catching up a shortfall The insurance company that provided your endowment policy should write to you to warn you if it isn't likely to repay the whole of your mortgage. There are a number of options that can help you catch up on the shortfall. Before you make any changes to your mortgage check your mortgage agreement to see whether you would have to pay any penalty charges (redemption fees). These fees can be expensive, especially if you've only had the mortgage for a few years. Back to top
Increasing your payments You may choose to keep your existing endowment policy and pay more into it to make up the shortfall. If you are in a high tax band, you may have to pay more tax if you do this. You may be entitled to compensation if you weren't warned about this when you took out your policy. Back to top
Paying a lump sum When interest rates fall, the amount you pay to your lender usually falls as well. You may be able to use the money you save to make a lump sum payment to make up the shortfall. Check if you will have to pay redemption fees for paying off part of the capital you borrowed early. Back to top
Taking out a separate investment You may want to keep your original policy running at the same level, and take out a separate investment to cover the shortfall. Many people choose an individual savings account (ISA) to do this. Some ISAs are linked to the stock market, and others aren't. You should think about whether you are prepared to take the risks involved with investing in the stock market before you choose. Back to top
Switch the shortfall to a repayment mortgage You may be able to keep your existing endowment going at its current level, and convert the predicted shortfall to a repayment mortgage . Part of the capital you borrowed will be paid off during the remaining term, and your endowment policy will pay off the rest at the end of your mortgage. Ask your lender whether this is possible, and how much it would cost. Back to top
Switching the whole of your mortgage to repayment You may decide that you are not happy with the risks involved, and choose to take out a repayment mortgage. You can do this through your existing lender, or by switching to a new one. You can keep your endowment policy going if you want to. This will give you a much bigger lump sum than if you sell your policy or cash it in early. If you don't want to keep your policy going, you may have to take out separate life insurance. This can be expensive. It can be difficult to get life insurance if you are older or have health problems. Back to top
Selling or cashing your endowment in early Your endowment policy may have a surrender value if you've been paying into it for at least two years. This is the amount you will get if you end the policy. However, you won't get as much as if you continue to pay into the policy until it matures. You could even get less than you have paid in. This is because you pay most of the fees and expenses involved at the beginning of the policy. The longer you keep it, the more it will earn. If you have been paying into your policy for at least five years but don't want to keep it going, you may get more money for it if you sell it rather than cash it in. Get advice from an independent financial adviser before you decide. Back to top
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