Is it true that benefit claimants are penalised if they switch from endowment mortgages to repayment ones ?
I know of a man who is about to reject the opportunity to make the switch because his mortgage adviser has told him that he will be 100 per month worse off because of the effect on his benefit payments.
The man has become severely disabled since he was sold the endowment mortgage. Despite achieving an offer of compensation via the FOS, he is afraid to take the "full" offer of an assisted move to a repayment basis, and is set to keep a disastrous endowment policy going.
I don't know about being penalised. Benefits will only pay the interest element of a mortgage. With repayment this means you have to pay the proportion that repays capital yourself. This rises over the life of the mortgage. You still have to fund the endowment payment yourself anyway though.
It may be that the adviser has sound reasons for his recomendation. If the disability has affected his potential lifespan for instance then it may not be a good idea to give up the life insurance included with the endowment.
The only reason I can think of why this might apply is if by switching to a repayment, the value of the endowment becomes available capital (no longer earmarked for the mortgage), and so could disqualify him from means tested benefits. Even if he used it to pay a lump sum off the mortgage this could be viewed as deprivation of capital which could still disqualify him.
Try asking on uk.gov.social-security where there are several experts in this area.
I'm a bit out of my depth here and you should double check anything I say. People I have worked with on both repayments and interest only have had payments to cover the interest element. Obviously with a repayment the interest element drops as time goes on although the payments remain the same. A long time ago it was yet another reason given to sell endowments. That if you had to go onto state benefits you would be better off with an endowment. I don't know about implications of changing mortgage type whilst already in receipt of payments.
Someone has already said that surrendering the endowment may take the persons capital over the limit to get means tested benefits (income support in this case), which would cut the benefit or remove the benefit entirely.
One anomaly is that there is a standard rate of interest used to calculate the payment made- regardless of the amount he is actually paying. Will he get as favourable an interest rate as the one he is currently on?
Can't you or the person concerned go back to the mortgage adviser and ask why he has made the recommendation he has?
It may be that he will have 100 per month less in benefit payments, but will have the cost of the endowment less to make in outgoings.
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