Endowment shortfalls mean misery for million over-50s

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Older borrowers in Scotland face average deficit of £65,000, reports Jeff Salway

More than one million people over the age of 50 are set to suffer endowment shortfalls that will force many to sell their home, according to research published in the wake of a fresh warning over the UK’s interest-only mortgage timebomb.

Under-performing endowments have left thousands of older borrowers in Scotland facing an average shortfall of £65,000, compared with a £49,000 average for the UK as a whole, the Saga Equity Release Advice Service has estimated.

More than half of over-50s surveyed by the group have been in their home for more than 20 years, but one in six of the Scots facing shortfalls in their investments believe they will have to sell their home to pay off their loan.

The alarming figures emerged as the City watchdog warned that almost half of interest-only mortgages may not be able to clear their loans at maturity. The 
average shortfall will be more than £70,000, the Financial Conduct Authority said in its report on the interest-only mortgage crisis.

For many older borrowers the shortfalls will be the result of failing endowment investments.

Millions of endowments were taken out in the late 1980s and early 1990s, with homebuyers banking on the investment growth from the products to clear their mortgage at the end of the term.

However, the vast majority have failed to deliver the promised returns, as millions of people are now finding out. Some two million endowment policies mature in 2012 alone, most of which will fail to pay out the funds needed to clear the mortgage they’re needed for.

Of almost 14,000 Scottish Widows endowment policies reaching maturity this year, all but a tiny handful will fail to meet their projections. Fellow Edinburgh insurer Standard Life admitted earlier this year that 98 per cent of customers holding its with-profits endowments are
expected to suffer shortfalls.

William Hunter, director at Hunter Wealth Management in Edinburgh, said: “The real reason endowments didn’t perform was that the economic climate changed to a low interest rate environment, which was detrimental to endowments that required a high rate of investment return to cover the life company charges and meet the high investment targets.”

A typical 25-year, £50 a month mortgage endowment taken out by a 29-year-old man would pay just £25,432 on maturity this year, down from £27,207 12 months ago, according to research by Money Management magazine.

Many people were mis-sold their loans by unscrupulous advisers and banks who would only offer repayment mortgages to borrowers with the biggest deposits, according to Hunter.

Of the Scottish homeowners facing shortfalls, 16 per cent have already bought themselves extra time by extending their mortgage term, Saga found, while one in three plan to dip into their savings to pay their mortgage. But one in ten, including those with some plan in place, still don’t know how they’ll be able to pay off their mortgage.

A growing number of Scots are turning to equity release plans in a bid to plug the gap.

Sales of the products, which allow homeowners to unlock cash from their property while continuing to live there, soared by almost a fifth last year. Scots released almost £47 million from their homes in 2012, according to Key Retirement Solutions.