Catching up on an endowment shortfall

This content applies to Scotland only.

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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.

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. However, you should check first whether you will have to pay redemption fees for paying off part of the capital you borrowed 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. 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 before you choose. The MoneySupermarket website has more information on ISAs and allows you to compare the interest rates on hundreds of different accounts.

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. 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.

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, which 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, which 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 may 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 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 (IFA) before you decide. Visit the IFA Unbiased website to find an IFA near you.