Personal Finance: No final send-off for the endowment mortgage

The good news is: one in four of all the new ones is all right.

Another of Britain's biggest mortgage lenders gave the red card to the beleaguered endowment mortgage this week, prompting another dire rash of "the game's over" reports. Industry number-crunchers had already dealt a serious blow to the product last month with a headline-grabbing report saying 75 per cent were too expensive and too risky.

But how's this for a headline? One in four new endowment mortgages is all right. It is difficult to hear that message amid the criticism from consumer groups. They say high charges in different economic conditions mean existing policies may not earn enough to pay off mortgages.

Some 500,000 existing endowment mortgages may have to be boosted by additional premiums, and people are advised to seek compensation if financial advisers did not fully explain the risks when they took out the mortgage.

The damning report, by the Institute of Actuaries (IoA), told providers and independent financial advisers to reduce growth assumptions they use to decide whether an endowment will safely pay the mortgage debt. So, suddenly, fewer look like they will.

Nationwide, Britain's biggest building society and Number Four mortgage lender, dropped endowment mortgages this week. Just one in 50 of its new mortgages is backed by an endowment policy.

Nat West may follow suit. It said endowment mortgages now accounted for only 10 per cent of new business. Life assurer Pearl stopped running its overpriced endowment mortgage two weeks ago. But endowment mortgages have not completely expired.

Sales have been falling steadily since their zenith in the late Eighties when high inflation eroded the value of the mortgage debt and it made sense to put off repayment as long as possible. Since then, for gradually increasing numbers of people, endowment mortgages were the wrong product.

The UK's Number One mortgage lender, the Halifax, ditched endowment mortgages months ago, saying demand had waned since it adopted a mortgage plan backed by an individual savings account as its flagship product. The Abbey National said endowment mortgages had slumped to 5 per cent of its new sales, and 30 per cent were ISA-based.

PEPs and ISAs are a sound alternative for those who want an interest- only mortgage rather than an interest and capital repayment mortgage. In the early Eighties, tax relief on the life assurance part of the endowment policy spurred their growth, but this is long gone.

An ISA - by definition - is a tax-free wrapper for your investments, and there is no capital gains or income tax. ISAs are also far more flexible. There are huge penalties for cashing in an endowment policy early, but ISAs allow easy access to your money.

Charges for endowment policies are heavily front-end loaded, meaning that in the early years, only a relatively small proportion of your payments is invested, the rest going on administration charges and a fat commission for the salesman. You would have to be insane to want an endowment mortgage over an ISA-backed one, right?

Not quite. Some advisers see uncertainty over the ISA-backed mortgage, because the Government has guaranteed ISA's tax perks for only the next 10 years. Most of the large life offices which offer an endowment mortgage are determined to carry on flogging it, adamant this particular horse is not dead.

Lloyds TSB, the Bradford & Bingley and Allied Dunbar are among those who have abandoned endowment mortgages lasting less than 15 years, slammed as particularly risky by the IoA. But others are trying to salvage something.

Bob Gibson, head of marketing at Scottish Widows, said its 15-year or less endowment mortgages looked too expensive when strung up on the IoA abacus, but added: "We are trying to find a way to make it attractive, satisfying individuals' expectations and confirming the viability of the product. We could reduce charges but something else may have to give."

Endowment mortgages for longer than 15 years can still be attractive for some new housebuying, even according to the IoA, provided:

nThe policy is assessed on the basis of no more than 6 per cent annual growth, and compared with a repayment on that same basis

nCustomers are aware of the risks and take an optimistic view of the stock market, where 80 per cent of an endowment's sums are invested.

The Bradford & Bingley is one of the biggest names still backing endowment mortgages. One in three of its mortgages is backed by an endowment, compared to a national average of one in four. It says it kept demand steady by stripping away the "hysteria" of recent months and making sure homebuyers have the complexities explained to them, with risks and benefits set out.

Anne Keen, of advisers Keen Independent, said those likely to find endowment mortgages attractive include "young nomads" - first-time buyers anticipating moving house repeatedly through their lives, who don't want their savings eaten up by redemption charges. Regular trading up can also mean homeowners could end up with a huge repayment mortgage that will take too long to pay off.

"Endowment mortgages are suitable for a younger person with at 20 to 25 years for paying one off, someone who has a balanced attitude to risk - someone who would consider investing in equities and understands shares can go down as well as up in the short term.

"Sometimes they are better off with an endowment, because you can add waiver of premium, critical illness cover, all the little extras you need. It is far cheaper to add them to the endowment than to buy them separately."