Skip to main content

View our coronavirus (COVID-19) housing advice

Catching up on an endowment shortfall

If your endowment policy is not likely to repay the whole of your mortgage, the insurance company that provided it should write to you to warn you that this is the case. There are a number of options that can help you catch up on the shortfall.

Before you make any changes to your mortgage, you should first check your mortgage agreement to see whether you would have to pay any penalty charges (redemption fees). These fees could be very expensive, especially if you've only had the mortgage for a few years.

How shortfalls develop

Many endowment policies that were taken out when interest rates were high (for example, between 10% and 12%) were issued on the assumption that it was reasonable to expect them to earn between 7% and 9% each year. However, when interest rates fell, millions of people were left with a policy that would not produce a large enough lump sum to pay off their mortgage.

If you have an endowment policy that isn't going to cover your mortgage, you should have received several letters from your lender. If you're worried that this might be the case, get in touch with your lender to make sure there isn't a problem.

Increasing your payments

You may choose to keep your existing endowment policy, but pay more into it to make up the shortfall. However, if you are in a high tax band, you may have to pay more tax if you do this. If you weren't warned that this was the case when you took out your policy, you may be entitled to compensation from the company that sold you your policy.

Paying a lump sum

When interest rates fall, the amount you pay to your mortgage lender to pay off the interest on your loan usually falls as well. You may be able to use the money you save as a lump sum payment to make up the shortfall. You should check whether you'll have to pay extra fees for paying off this part of your mortgage off early.

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. The MoneySupermarket website has more information on ISAs and allows you to compare the interest rates on hundreds of different accounts.

Switching the shortfall part of the mortgage 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. If you do this, part of the capital you borrowed would be paid off during the remaining term, and your endowment policy would pay off the rest at the end of your mortgage. Ask your lender whether this is possible, and how much it would cost.

Switch all of your mortgage to a repayment mortgage

If you're unhappy with the risks involved you could take out a repayment mortgage. You can do this through your existing lender, or with a new one. You can keep your endowment policy going if you want to. This would 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 could be expensive and may be difficult if you are older or have health problems.

Selling or cashing in your endowment early

If you've been paying into your endowment policy for at least two years it might have a surrender value. 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, and could even be 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. An independent financial adviser will be able to help. Visit the IFA Unbiased website to find an IFA near you.

Scotland map Housing laws differ between Scotland and England.
This content applies to Scotland only.
Get advice if you're in England

The important points

  • If the endowment policy that you have invested in is unlikely to cover the cost of repaying your mortgage, the insurance company should write to you.
  • Shortfalls can develop because interest rates are much lower than expected so the investment does not pay as much as predicted.
  • You have several options if your endowment policy won't cover your mortgage, including switching to a repayment mortgage and cashing in or selling your endowment early.

If you're still looking for help, try searching, or find out how to contact us