A lesson learned on endowments

INSURANCE companies are predictably rushing to defend the marketing of endowment, pension and PEP mortgages - all of which the Office of Fair Trading has seen fit to criticise. They sell £30bn worth of new mortgage- linked policies each year, and that business depends on restoring faith in their products after the doubts raised by the OFT.

The criticism in the report is in fact levelled largely at the lenders and the salesmen, agents and advisers who sold endowment mortgages as if they were unquestionably the best policy for home buyers in all circumstances. Even they could not have foreseen how the Government would drive up real interest rates, bring down inflation and reduce the tax advantages that endowment mortgages enjoyed.

They might not have anticipated how rising divorce and unemployment rates would force many borrowers to sell their homes well before the policies could reach maturity. But they said little to warn borrowers about the penalties for early surrender, and failed to draw attention to the fact that they benefit from commission on the sales of endowment policies. There is no doubt that many homeowners were encouraged to surrender policies and take out new ones when they moved - to generate new commission for the salesmen.

The rules on disclosing commissions that came into effect this year should aid the understanding of borrowers. They could already be responsible for the recovery in demand for repayment mortgages, which pay no commission at all.

With or without legislation, there is no doubt that better information on the choices available is the best way of reducing problems in the future.

Relatively little of the criticism is aimed directly at the insurance companies, which have been largely passive suppliers of products for the lenders and their salesmen to package. Over the past 25 years, endowment policies have been better investments than repayment mortgages, and over the next 25 years they may be again.

But if endowment mortgages are to retain their market share, lenders will become much more choosy about which endowment policies they offer as home buyers become more aware. Only the best will flourish. Next week, we shall show you how to identify them.