The number of people expected to face a shortfall with their endowment mortgage has more than doubled in the past two years. But according to mortgage broker Savills Private Finance, policyholders can address the problem by remortgaging their loan.
The Association of British Insurers (ABI) has said 35% of endowment policyholders will receive notification encouraging them to take action by placing them in the ‘red’ category. The figures for those in this category have increased substantially compared with just two years ago when only 15% of policyholders fell into the red band.
According to the ABI, those in this band will need to achieve growth of more than 8% to repay their mortgage, which indicates the policy almost definitely faces a shortfall.
However, Emma Grainge, spokesperson for the ABI, said: ‘The first thing people should not do is panic as it is relatively easy to take action.’
Those facing this dilemma have several options to compensate for the shortfall. Grainge said: ‘You could change to a repayment mortgage, make up the shortfall by other means, run an alternative savings vehicle or see if you could either increase the term of your mortgage or increase repayments.’
Savills Private Finance, however, said endowment policyholders could remortgage to a cheaper loan and use the saving to counter balance any shortfall on their endowment policy.
Mark Harris, director of Savills Private Finance, said: ‘With low interest rates, and falling stock markets, endowment mortgages have failed to perform, leaving borrowers with a significant mortgage shortfall. However, one way in which borrowers can supplement this shortfall without having to fork out any extra cash each month is by remortgaging.’
But Victor Jannels, group managing director at All Types of Mortgage, said policyholders must seek advice on replacing their endowment policy if they decide to withdraw from it.
He said: ‘In many cases, very few people have replaced their policy but what happens if they do not replace it? Will there be another scandal and who will be responsible?’
A total of 10.2 million letters are to be sent out over a three-year period until June 2004. The letters form part of the ABI’s endowment code, designed to provide policyholders with regular updates on the progress of their mortgage endowment policies.