Endowments Ask the experts: homebuying I’m thinking of topping up its current cash-in value with a personal loan so I can pay o
Q The current fixed-rate deal on my interest-only mortgage of £47,000 will finish at the end of next March, and the entire mortgage term is due to end in July 2023. My endowment will mature a year before that and is on track to pay out £49,800 at the low rate and £57,300 at the mid rate. It has never performed better than the mid rate since it started, and has frequently performed at the low rate, leaving me with a potential small shortfall at times.
My yearly endowment statement has just arrived and the cash-in value is now £41,000. So rather than just remortgaging next March, I’m thinking of cashing in the endowment early next year and topping up the £41,000 with a personal loan of £6,000 so I can pay off the entire mortgage of £47,000. I only have £2,000 in savings and that’s not likely to grow quickly as I’m focusing all I can on pension payments. Is it a good idea to cash in soon, or am I missing something here?
I’m 52, single and a full-time employee on an annual salary of £30,000. My mortgage payments are £106 per month and the endowment is £121 per month. The target amount for my endowment is £53,200 but I’ve been paying off £1,000 on the capital amount when remortgaging when I can. Hence the current mortgage loan of £47,000. I would appreciate your advice as I’m worried there’s some glaring reason that cashing in would be a bad idea and I just can’t see it. VB
A If £41,000 genuinely is the cash-in value of your endowment – rather than the amount guaranteed to be paid on your death – cashing it in would seem to be a reasonable option. As you are single and don’t mention any dependants, you don’t need to buy another life insurance policy to replace the life cover provided by your endowment. That means you will save the £121 a month that you currently pay for your endowment. Over the next five years that monthly saving mounts up to £7,260 in total, which, when added to the £41,000 cash-in value, is £48,260, not far off the £49,800 the endowment is projected to pay out in July 2022 when you say it matures.
Assuming you continue to pay interest at your current rate of 2.7%, your monthly mortgage payment would fall to £13.50 – meaning a saving of £92.50 – a total of £6,660 over the six years until the end of the mortgage term. Even if the interest rate on your mortgage jumped to 5%, you would still save £81 a month (a total of £5,832 over six years).
Rather than taking out a personal loan to pay off the mortgage in full, you would be better off leaving the mortgage amount at £6,000 because even the most competitive personal loan is going to be more expensive than most mortgage lenders’ standard variable rates. You can get an even better deal by using the monthly savings to make overpayments on the small remaining mortgage, paid off in full in less than three years’ time.