Lenders slow to use life market: Selling policies could offer better returns

MORTGAGE lenders may be short- changing borrowers by not using the second-hand market to re-sell life policies that come into their possession, writes Sue Fieldman.

Over the years thousands of people have assigned their life policy to a lender as security for their mortgage. If you default on your mortgage the lender can surrender the policy and use the proceeds to pay off the mortgage debt with any surplus going back to the borrower.

When a building society repossesses your house there is a duty of care to get the best price. However, lenders can surrender a life policy without necessarily shopping around to see if they can get a bigger payout elsewhere. If you need cash, surrendering a life policy to the insurance company used to be the well-worn answer - and a meagre answer it is with often pitiful surrender values.

In recent years a thriving market has grown up in second-hand policies. You can often get a much higher price for a policy if you sell instead of surrendering - provided that the policy is one in demand.

Broadly you need a with-profits endowment policy with a surrender value of more than pounds 2,000. It must have completed 25 per cent of its life, and have no more than 15 years left.

Christopher Dobie of the policy market-maker Beale Dobie reckons that there are 1,000 people a week surrendering policies who perhaps could do better if they sold.

However, mortgage lenders appear disinclined to go into the open market with their repossessed policies.

Edward Gold of Barnett Gold Financial Services buys and sells policies on behalf of clients. He says: 'The lenders as a whole seem not to be aware that they could get a better price if they shopped around.'

Mr Dobie has also noticed a marked disinterest in anything other than surrender. He says: 'We have talked to the lenders but they just do not seem to get round to doing anything about it. It is a pity.'

The lenders say that the majority of the policies that come into their possession have lapsed or are unsaleable.

As for those that do have a value, a spokesman for the Woolwich says: 'We would surrender a policy direct to the insurance company. We would not shop around'.

A spokesman for Abbey National says: 'Generally we surrender directly to the insurance company. In terms of the second-hand market it is possible - we do not exclude it'. Halifax is 'looking at' the second- hand market.

There is no contractual duty on lenders to get the best price but if they surrender rather than sell they could face disgruntled borrowers.

Roy Brown, the head of secured lending at the solicitors Hamlin Slowe, says: 'There is a common law duty of care to mitigate one's loss. So a borrower who is being pursued by a building society for a shortfall, could argue that the building society might have obtained a better price for the policy it had been sold rather than surrendered to the life company. It could be an arguable defence to the amount of the claim.'

If you are thinking of surrendering your policy, think again. There are alternatives, such as taking a loan from the issuing insurer against the policy's value. Financial advisers should be able to advise on the options.