Doctor, it's my endowment ...

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The Independent Online
People often corner me to tell me about their financial problems (now I know how doctors feel) and endowments often top their worry list. Not surprisingly, many people are upset that the mysterious savings plans sold to them as a financial wonder drug have turned out to have some nasty side effects. Like the fact they may not pay out enough cash to cover the mortgage debt.

Many of us are hazy on what an endowment is - including plenty who are the less-than-proud owners of these policies. Simply, an endowment is a savings plan with a fixed timespan - usually 25 years, to match the term of a mortgage. If you keep paying until the end, you reach the pot of gold, known as the "terminal bonus". Then the endowment cheque pays off the capital outstanding on your home loan plus some extra money to set you up for retirement.

Except nothing works like that anymore. Interest rates are low and inflation is low. Both of these affect returns. And despite the fact that the stock market has been booming, this hasn't been reflected in annual bonuses - currently around 5 to 6 per cent. Many endowments were sold using projections of 10 per cent annual bonuses.

If you were a naive home buyer in the late Eighties and early Nineties, you probably have an endowment with 10 or 15 years to run. It's worth deciding on a plan in case the policy does not pay out enough cash to cover the mortgage. Someone in this position showed me a letter about her scheme. She needs pounds 70,000 to pay off the loan in 15 years' time. Ten per cent growth each year will yield pounds 150,000. But a more realistic 5 per cent means she'll get a payout of pounds 48,500.

She's already contacted her mortgage lender about swapping to a repayment mortgage. Another option is to save extra cash to meet any shortfall in a stock market based individual savings account (ISA).

You also have the right to be angry. One reader e-mailed: "Do the millions of us who took out endowment mortgages have no legal redress?" No one's sure. The Financial Services Authority is looking into the matter, and if it finds a mis-selling case to answer, there could be compensation.

Just don't bank on it being resolved before your final mortgage payment is due.