Switch may help you ride crisis

We are just halfway through the with-profits bonus declaration season and it's already clear that most mortgage borrowers who are using a with-profits endowment policy to repay their loans face a shortfall.

The Association of British Insurers has not yet collated details of the second phase of projection letters, indicating how many people have been told they will face a shortfall by their insurance company, even though the third phase starts in May.

But figures for the first phase, published last May, showed that 26 per cent of policies had been issued with amber and 35 per cent with red. This position can only have worsened, with the stock market falling by 28 per cent in the last year and insurers slashing bonuses, in some cases to zero.

Two weeks ago we reported that financial advisers were telling some clients that they would be better off cashing in their endowment policies now. These include investors who have just a short time to go until their policy matures, whose insurer has not yet declared this year's annual and final bonuses and whose policy is not subject to a massive penalty for early encashment. In these circumstances, the policyholder can use the payout to pay off as much of the mortgage as possible, and convert the remainder to a repayment mortgage, paying off capital as well as interest every month.

But what should those who would not benefit from encashing their policy now do about their shortfall? Well, the good news is that the same economic uncertainty that is causing the current stock market turbulence has also resulted in the lowest interest rates in 50 years. So while you are losing on your endowment, you can almost certainly claw some back by switching your mortgage. And if you convert some or all of your interest-only mortgage to repayment at the same time, you can use any saving made by remortgaging to a cheaper mortgage to cover the expected shortfall in your endowment payout.

Mark Harris of independent mortgage broker Savills Private Finance says that mortgage holders can still save money on the whole deal if they convert just half their mortgage to repayment, which he believes should be more than enough to cover any shortfall in endowment payouts.

He cites the example of a borrower with a £100,000 interest mortgage over 25 years on Halifax's standard variable rate, currently 5.65 per cent, which would cost £470.83 a month. The borrower is told, five years into contributing to an endowment policy to repay this mortgage, that there will be a shortfall.

Harris says the borrower could remortgage to a Co-op Bank loan discounted by 1.2 per cent from its standard variable rate of 5.09 per cent, with half the loan- £50,000 - converted to a repayment basis over the remaining 20 years, costing £303 per month, plus another £162 per month for the remaining £50,000 which is still interest only. The total cost of £465 per month gives the borrower a saving of £5, and the shortfall is covered.

Harris uses this loan in the example because the Co-op offers free valuation and legal fees for homeowners who are remortgaging. But the cheapest loans last week were from Britannia Building Society, which is offering loans fixed for two years at 3.29 per cent with a £495 application fee, or 3.39 per cent with a £295 fee. David Hollingworth of mortgage brokers London & Country says those borrowing more than £100,000 would be better off paying the higher fee in return for the lower interest rate.

The Alliance & Leicester is also offering mortgages fixed at 3.45 per cent for two years or 4.25 per cent for five years. Both schemes have an application fee of £295 and six months' early redemption penalties, but first time buyers get a free valuation, buyer's insurance and either free conveyancing or £250 cashback.

Existing Alliance & Leicester customers or those with the bank's Premier current account also get £300 cashback and a free basic valuation. Alliance & Leicester is also offering loans discounted by 2.35 per cent for two years, to produce a current rate of 3.44 per cent.

Borrowers who want the option of paying back more than the standard premium every month may want to consider a slightly more expensive loan from the Leeds & Holbeck.

The Leeds & Holbeck is fixing loans at 4.29 per cent for five years, 0.04 per cent higher than the Alliance & Leicester rate, but the early redemption penalties gradually reduce during the fixed rate period and borrowers can repay up to 10 per cent each year without penalty.