If you get compensation from making a complaint about the sale of your endowment policy, you should consider using it to reduce the amount you owe on your mortgage.
What can I do now to make up a shortfall?
There are various ways to make up the gap. Some offer more certainty than others. The options available to you are to make changes to your mortgage, start an additional investment or savings plan, or to make changes to your existing investment or savings plan. These are explained below.
You may find that one of the options already matches your existing repayment arrangements. If so, consider the pros and cons of continuing or switching to an option that is better for you. Always take advice if you are not sure which option is right for you.
The figures in the examples that follow are for illustration only.
Example
Helen is 48 and has an interest-only mortgage of £50,000 linked to an investment. The mortgage has seven years left to run and the interest rate is 4.8%.
She asked her product provider to give her an up-to-date projection and this told her there is likely to be a shortfall of about £10,000.
Helen wanted to change £10,000 of her mortgage to a repayment method, but her payments would have increased from £200 a month to £302.97 a month and she didn’t think she could afford the increase. Helen talked to her lender, who told her that she could extend her mortgage term by five years as it will still be repaid by the time she retires, though extending the term does mean that she will pay more in total.
Her monthly payments will now be £252.96. When the investment pays out in seven years and she pays off most of the mortgage, her payments will reduce.
1. Make changes to your mortgage
Ask your lender to switch part of your mortgage – the amount of your projected shortfall – to a repayment method.
Your current projected shortfall should be paid off by the end of the mortgage term.
Should be fairly simple to arrange at low cost.
Could be a flexible option – if the projected shortfall grows, you can switch more of your loan to a repayment method.
Ask your lender to convert your whole mortgage to a repayment method so that you repay all the capital by the end of the term.
Your mortgage will be paid off at the end of the term if you keep up the payments.
The longer your mortgage has to run, the smaller the increase in your monthly repayments will be.
If you can afford it, you could continue with your investment or savings plan just for saving.
And some investment products include useful insurance cover such as life cover, or another
type of cover such as critical illness insurance.
If you were to cash in your investment you could lose out financially, and you may need to arrange other insurance cover.
So consider getting advice first if you are at all unsure.
If you want to convert your whole mortgage to a repayment method but are worried that you might not be able to afford higher payments talk to your lender. The increase in payments may not be as much as you think and your lender may be able to come up with a plan that can help you.
For example, a repayment mortgage of £50,000 and an interest rate of 4.75% with 15 years to run will cost you £388.41 a month. But in some cases you may be able to extend the term of your mortgage – a mortgage of £50,000 with 20 years to run and an interest rate of 4.75% would be £322.74 a month. This would limit the increase in the monthly payments, though it does mean that you would pay back more in total over the mortgage term. Think very carefully about extending the term if it would end after your retirement age.
Repay part of your mortgage early by paying off a lump sum, or by overpaying each month.
This will reduce the amount you owe, and the amount you need your investment or savings plan to cover.
It may be better value than saving up separately to pay off the shortfall in future.
You should check whether your lender will make an early repayment charge if you overpay.
You should also check when your lender will give you the benefit from extra payments – some do so only once a year.
Making changes to your mortgage is probably the lowest-risk option to make up a shortfall. Ask your lender if there will be any charges for making changes to your mortgage, and how much these will be.
2. Start an additional investment or savings plan
Use a cash savings account.
The amount you get back does not depend on the performance of the stockmarket.
May be a good option for the short term – for example, if you have to delay paying off a lump sum from your mortgage because of early repayment charges, or your mortgage is near the end of its term.
Taxpayers can avoid paying tax on their interest by saving in a cash ISA. (But remember there are limits on how much you can pay into an ISA each year.)
In the long term, other options (such as overpaying on your mortgage payments) are likely to prove better value for money.
Use a stocks and shares ISA.
Potentially a good way of saving over the longer term. Historically, stocks and shares have grown more than cash savings accounts which have interest added. (But remember there are limits on how much you can pay into an ISA each year).
Currently a tax-efficient way of saving. However, not sure of the government policies in the future
This type of product is linked to the stock market, and the value of your investment could fall as well as rise. So there’s no guarantee that your investment will grow enough to make up a projected shortfall.
Stocks and shares ISAs are meant for investing in the long term, and generally may not be suitable if you only have a short time to build up a lump sum.
If you decide to start an investment or savings plan to make up a shortfall, it would be a good idea to take financial advice.
Link to Previous article: Pay your mortgage with investment/saving plan
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