Under policies that are legally signed over to the lender as security, banks, building societies and other mortgage companies normally have the right to call on the proceeds of the endowment policy if the borrower does not honour the terms of the mortgage agreement. The most likely way that a borrower would fall foul of these rules is by falling into arrears.
It is widely known in the mortgage business that lenders are cashing in endowment policies after a house has been repossessed.
But one Independent reader, who wants to remain anonymous, claims her endowment policy was stripped away by her lender long before her difficulties became acute. She had fallen into arrears and the mortgage company, a division of a high street lender, had been told of the reasons for the difficulties, she says.
'In September 1991, I was informed by them that the sum of pounds 10,000 had been paid into my mortgage account, thus wiping out my arrears and reducing the outstanding balance by a further pounds 4,000.'
Her delight at being bailed out was fleeting. She learned that the lender had cashed in the endowment policy backing the loan. This was done without her knowledge or consent, she says.
'Morally, I think I should have been informed by both the insurance company and the mortgage lending company, and certainly given the opportunity to sell the policy on the open market via a policy broker, possibly receiving as much as 30 per cent more.'
This borrower has now had her endowment mortgage converted to a repayment loan.
Solicitors, lenders and insurance companies all confirm that endowment policies that are 'assigned' to mortgages give the lender the power to call in the proceeds of the policy without the borrower's consent. Until the past two or three years most endowment mortgages were assigned to lenders, although a number of banks and building societies have recently dropped this requirement.
According to Jennifer Israel, solicitor, it is technically possible for lenders to call on non-assigned policies, although this is more difficult.
An assigned mortgage is security for the lender. 'When you mortgage your house you give the lender the power to sell. The same applies to any other security,' said Mrs Israel, a member of the Law Society's property committee.
A spokeswoman for Halifax Building Society, the country's largest lender, said: 'It is very rare for us to have to cash an endowment in.' The society no longer assigns endowments to mortgages, she added.
Stephen Balme, mortgage marketing director at Citibank, said: 'Technically we would be allowed to cash in an endowment to offset against arrears without the borrower's consent. But we don't do it.' Usually, little or no value had built up in the policies.
Barry Meeks, commercial director at The Mortgage Corporation, said his company had been cashing in endowments to set against arrears but only with the agreement of the borrower and only if it was a sensible way to help them. Borrowers were counselled first.
Frank Begby, a service manager at Standard Life, one of the country's largest life insurance companies, said he had seen many instances where lenders had come to the company to cash in policies. But the company assumed the policyholder had been informed.
Fimbra, the regulator for independent advisers, is tightening up on the forecasts brokers can make about the likely proceeds from second-hand endowments. They must now be calculated in accordance with rules set by the life insurance regulator, Lautro.Reuse content