Millions have been snared, but endowment holders can still spring the mortgage trap

Melanie Bien shows how to make up the shortfall if your policy isn't likely to pay off the home loan
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The Independent Online

As if it wasn't bad enough that homeowners throughout Britain are facing a shortfall on their mortgage endowment policies, it now appears that the scale of the problem could be far bigger than originally thought.

The Association of British Insurers (ABI) believes that 1.5 million policyholders could be affected, although the Financial Services Authority reckons 3.5 million is more accurate. But several of Britain's largest insurers last week suggested the true figure was closer to six million.

At a Treasury Select Committee hearing into the sale of endowment policies, the heads of Aviva, Legal & General, Prudential, Royal & Sun- Alliance and Standard Life revealed that about 70 per cent of endowment mortgage holders could face a total shortfall of between £30bn and £50bn in the next 10 to 15 years.

To make matters more confusing, the potential shortfalls vary considerably from insurer to insurer. Prudential policyholders, for example, can expect an average shortfall of around £3,500 on their endowment. This rises to £7,000 for Royal & Sun-Alliance investors.

The chief executives were told by the committee that they hadn't done enough to let policyholders know they can complain if they think they've been mis-sold a policy. Fewer than 10 per cent of those affected by endowment shortfalls have complained; those who have successfully done so have won a total of £873.5m in compensation.

While the figures emerging from the select committee hearing are bleak, it only makes matters worse that not all policyholders have taken action to address potential problems.

"Bearing in mind that every endowment holder gets a letter from their provider projecting whether their policy is likely to pay off their mortgage or not at the end of the term, most people know about the possibility of shortfalls," says Ray Boulger at mortgage broker Charcol. "However, there is still a significant minority who haven't taken any action."

Despite this, Mr Boulger warns homeowners not to panic. "People tend to take these projections as gospel and think that is definitely what their policy is going to produce," he says. "But you can be 99.9 per cent sure your endowment won't produce that sum. It might not even be as bad as that."

Insurers are obliged to send regular projection letters to endowment holders, telling them whether their policy is likely to clear their mortgage at the end of the term. So you should already have some idea of whether or not you are facing a shortfall.

If you are, try imagining the worst case. Mr Boulger reckons it's fair to assume growth on your policy of around 4 per cent per annum, which even one of the worst-performing endowments should be able to achieve. This calculation will enable you to see how much extra cash you might need. And if your policy does perform better than expected, the surplus will be a bonus.

If there is likely to be a shortfall, you need to cover it. But ploughing more cash into the endowment is not a good move as it will already have underperformed.

A better solution is to remortgage your interest-only loan on to a part-repayment deal. As rates may well have fallen since you took out the mortgage, you could end up with a better rate of interest. This might mean your repayments stay the same or even fall slightly, while you pay off a chunk of your mortgage at the same time.

Switching to a part-repayment deal is likely to cost you a one-off fee of around £50. To avoid this, you could stick with your current mortgage and instead make overpayments to reduce the interest.

Most lenders allow borrowers to overpay up to 10 per cent of their mortgage each year without penalty. By making regular overpayments by direct debit, or the odd lump sum when you can afford to, you'll slash the interest you owe. And if you have a few thousand pounds sitting in a savings account and earning a relatively poor rate of interest, this is a good way of making your cash work harder.

If you haven't yet taken action, it may be that you simply don't need to. The ABI estimates that 41 per cent of endowments linked to a mortgage are no longer needed to pay off the loan. If you've built up resources, investments or savings elsewhere, this may be enough to cover the shortfall.

Want to complain if you feel you've been mis-sold a policy?

'All I want is to repay the loan'

Richard and Carol Exton face a possible shortfall of around £10,000 on their endowment. The couple took out the Canada Life policy in the early 1990s to repay the capital on the interest-only mortgage for their Sheffield home.

With just five years to go until the policy matures, they received a letter in November telling them of the potential deficit. "We are going to keep the endowment going as it is so close to maturity," says Mr Exton. "But we aren't going to put more money into it, as Canada Life has suggested. Instead, we are changing the mortgage to a part-repayment, part-interest only two-year discounted deal with Barnsley Building Society."

Mr Exton says it is all a far cry from the heady days when he took out the policy. "Endowments were all the rage at the time. All the paperwork that arrives afterwards says the targets aren't guaranteed, but it was all done with the suggestion that you would probably get a bonus on top eventually. But, as I said to the salesman at the time, all I want to do is repay the mortgage. And it looks like it isn't going to do that."

The couple, who both work in schools, are also taking out a guaranteed stock market bond with CIS. The cash this generates will be used to top up the endowment or pay their daughters' university costs.

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