8% yield on endowment policies attracts overseas investors, as does london property
Offshore banks are reporting increasing interest in two lending areas, gearing traded endowment policies (TEPs) and the top end of the London property market.
Royal Bank of Scotland International (RBSI) said there has been growing demand over the past 18 months among German investors in borrowing to increase exposure to TEPs funds.
Andy Wilson, relationship director, geared lending corporate and institutional at RBSI in Guernsey, said the demand has been driven by the projected yield on TEPs, the level of capital guarantees within policies and the perceived lower risk of these products compared to equities. He said the average yield on TEPs is currently around 8%. The impression of a capital guarantee embedded in the funds comes from the bonuses already collected by the TEPs.
Another reason for the increased interest is the familiarity of TEPs to German investors compared to the rest of continental Europe. "Germany does have a form of domestic TEPs but German policies tend to have a much larger value at between £70,000 and £80,000 compared to UK TEPs which are between an average of £10,000 and £15,000," said Wilson.
RBSI provides lending on TEPs funds rather than offer funds itself. Investors gear TEPs funds to try to multiply their gains, although it also multiplies any losses. Risk is reduced, said Wilson, through the funds diversifying across policies from different life insurance companies. Wilson added RBSI lends up to an average of 55% of the surrender value of policies. The cost of the loan varies from customer to customer but is typically between 1% and 1.5% above the base rate.
He noted the asset allocation of TEPs has changed significantly over the past few years. At the start of this year, said Wilson, the average equity exposure of the 24 leading life offices in the UK was 33%, although this covers a range from 14% up to 64%. However, overall, this is still significantly lower than five years ago. At the end of 2002, for example, Standard Life held more than 60% of its endowment funds in equities.
Bank of Scotland International believes it will see lending growth at the top end of the London property market despite the slowdown in recent months in the general market.
Mike Jones, business development manager, lending at Bank of Scotland International, said: "Our offshore mortgage business provides clients with everything they would expect from a traditional mortgage but with the potential of tax planning benefits. We can help clients to structure investments in a tax efficient manner using offshore company or trust structures.
"After the rate cut in August by the Bank of England, we have seen the volume of mortgage enquiries rise steadily. As a bank we are cautiously optimistic there will be a recovery in transaction levels."
RBSI sees growing demand from German investors to gear TEPs funds.
These investors are attracted by potential yields of 8%.
Bank of Scotland International believes investors are returning to the top end of the London property market.
Buy-to-let investors can reduce tax liabilities through offshore company and trust structures.
'Failure to pay attention can result in enforcement'
200,000 LISAs opened so far
From June 2019
11 years since launch of three Chartered titles
Hired 200 extra operational staff