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Bonus of contention

Millions of homeowners who are rel-ying on with-profits endowment

policies to repay their mortgage face an uncertain future. One of the

UK&#39s major life companies, Norwich Union, was the first to confirm

that bonuses have been cut this year. The average maturity value of a

25-year endowment maturing this year is expected to be 15 per cent

lower than last year.

This is a problem that is not going to go away. We are in an economic

environment of low interest rates and low inflation which, added to

an underperforming stockmarket, points to further misery.

Investors who have enjoyed double-digit inflation and growth during

the early years of their policies must look closely at likely

interest rate trends. At its January meeting, the Bank of England&#39s

monetary policy committee voted to leave bank base rate at a 37-year

low of just 4 per cent.

Economists are divided over the direction of the next interest rate

move. Booming house prices and consumer spending may lead to an

increase while Britain&#39s manufacturing industry continues to be

blighted by declining profitability and would benefit from a further

cut. Most pundits are predicting that rates will harden in the second

half of this year in line with economic recovery and finish the year

at around 4.75 per cent.

In the longer term, the movement of rates will largely depend on our

decision on entering the euro. A referendum is expected within the

next two years.

All indicators point towards a long, sustained, low interest rate

environment which will do nothing to help the maturity values of

endowment policies. However, it is not all doom and gloom. The very

fact that interest rates are so low means that all homeowners will

have seen a significant reduction in their mortgage payments.

The options for disgruntled endowment policyholders facing a

shortfall in their maturity values has usually been restricted either

to increasing premiums to their already underperforming repayment

vehicle or switching their loan to a repayment basis. There is,

however, an alternative which offers two bites at the cherry.

Many borrowers who are still paying a lender&#39s standard variable rate

are paying hundreds of pounds more than they need to. By remortgaging

to a better product, a borrower can use their saving to overcome

their endowment shortfall.

Take an average £100,000 mortgage supported by an endowment

policy with a projected shortfall of £20,000. If the loan is

moved from a lender&#39s standard variable rate of, say, 5.9 per cent to

one of today&#39s market-leading rates of 3.74 per cent, a saving of

£180 a month can be made. This can be used to switch

£20,000 to a repayment basis, guaranteeing that the mortgage

will be repaid and still benefiting from an overall saving of around

£40 a month.

My firm offers clients a free remortgage evaluation where we

benchmark an individual&#39s current arrangements against today&#39s best

buys to summarise any savings that can be made, taking into account

set-up costs. All evaluations are provided in the form of a report

which is set against the backdrop of interest rate commentary. We

extend our service beyond a client&#39s completion date to monitor an

individual&#39s arrangements to ensure they are benefiting from the best

available rates.

We also provide an annual report which summarises interest rate move-

ments and makes product-specific suggestions where necessary.

Recommended

Principality Building Society fixed mortgage

Fixed term: until 31/03/05Fixed rate: 4.99%Minimum loan: £5,000 Maximum loan: up to 75% of valuationIncome multiples: 3.5 times principall income and 2.5 times jointRedemption fee: 2% of advance for three yearsArrangement fee: £299Conditions: daily interestIntroducer fee: standard 0.34%, negotiableTel: 0800 328 1717

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At the beginning of 2015, we highlighted that the new pension freedoms that come fully online on 6 April also represent a very attractive opportunity for the criminal fraternity to scam savers out of some, or all, of their accumulated retirement savings.

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