I'm planning to carry a large mortgage into early retirement - anyone else?

[tjh290633]

What was wrong with endowment policies? They were opaque, high charging investment vehicles with fat commissions. That was what was wrong with them. The downsides may once have been mitigated by tax relief, but when that went they were doomed. It was only a matter of time before their inadequacies were exposed.

We took out our first mortgage in 1985 and although there was very hard selling of endowment mortgages the building societies would not turn away the mortgage business when you said no as they were awash with cash. As I understand it this was not the case in the 70s and earlier when it was very much a sellers market.

You put your trust in the Pru and it usually came up trumps. I had two which were whole life convertible to endowment, I converted in 1979 with 15 years to go on each, having started in 1958 and 1962 respectively. The IRR to maturity in 1993 was 11.95% on the first and 13.68% on the second. Another with NPI started in 1959 as a superannuation deal with FSSU. I paid in for 5 years then it was made paid up and taken in 1993, with an IRR of 11.73%. Another, taken with Eagle Star, was a low-cost endowment mortgage in 1982 maturing in 1997 and gave an IRR of 9.09%, while another Pru policy starting in 1974 and maturing in 1996 gave an IRR of 13.00%.

As you can see there are horses for courses. NPI went to the dogs late in that period, and Pru outshone Eagle Star. If we look at unit-linked policies, I had one with the Pru taken out in 1968 and maturing in 1997 which gave an IRR of 12.74%. Another with Hearts of Oak, via the AA, taken out in 1982 and maturing in 1991 gave an IRR of 14.58%. A 10-year with the PRU for 1982 to 1992 gave an IRR of 10.75%, but one taken out after the demise of LAPR gave an IRR of 7.43%.

Time periods matter, and inflation was rife at times. In general they did well.

TJH

[hiriskpaul]

The history and performance of endowment mortgages is both interesting and instructive.

I think what the missing info is on this topic: what were the endowment invested it?! The concept of low cost passive investing into a balanced global portfolio sounds simple today, but it is a relatively new idea in the overall scheme of things, and back in the 80s and 90s you would probably have been shoved into some active strategy, high on fixed income, and with shocking fees..

As I mentioned I was shoved into a UK only tracker as recently as the early 2000s, which then saw 20 years of miserable underperformance for an all-equity strategy. Nobody knew any better at that time..

There's far less an issue of what endowment policies were invested in.

And more an issue of market forces whereby the insurance companies were competing with one another to be top of the endowment policy return league tables. Add to that a culture of corporate greed where sales people in building society branches and banks were generously incentivised to up sell customers endowment mortgages and you have a recipe for disaster.

For in excess of a hundred years, insurance companies had successfully run endowment policy business without shouting from the roof tops or media hype.

There never really was a problem that needed fixing with the endowment policies themselves.

But introducing low cost endowment policies into a market becoming increasingly financially sophisticated at a time of light touch financial regulation, increasing corporate greed, media hype and property inflation was never going to end well. And it didn't

Hmm, I'm just not convinced on this... I'm not saying that there hasn't been misselling and bad practices along the way, but surely you want to know what's under the hood of anything that you're invested in - an "endowment" isn't an asset class, after all?

And yep, maybe these schemes have existed for a long time and been delivered what was marketed, but we've never seen such a huge bull market in fixed income either that pulled forward all future returns earlier than they should have been. Past performance etc etc

You are not on your own in making the mistake of viewing endowment policies in the 1980's with 2022 hindsight. The personal finance world in the early 80's was very different than it is today. As were the typical customer.

I am not here to convince anyone of anything.

Indeed. Back then most people trusted banks, building societies and insurance companies not to rip them off or sell them bad value for money financial products.

I didn't get an endowment policy because the projected returns did not stack up compared with simply reducing the mortgage with the savings made on the monthly payments from a repayment mortgage. Most people at the time would not have been able to do that calculation as they did not have access to a spreadsheet. I also could not get adequate explanations about how endowment policies worked - what they were invested in, what the charges were, how bonuses were calculated, etc. and was very suspicious of the hard sell. I was definitely in the minority at the time in wanting to kick the tyres, but I don't think branch staff were intentionally trying to mislead customers at the time just for the commission. They genuinely thought endowment mortgages were better for their customers than repayment mortgages.