Money: It's the way they sell 'em

Endowment mortgages themselves aren't the real problem, says Isabel Berwick

If someone told you about an investment that's returned an average growth of 12.5 per cent a year - over the last 25 years - then you might be interested. This miracle investment does exist - and it's called an endowment policy.

Surprised? If you took out an endowment investment scheme as part of a mortgage back in the early 1970s, it'll probably be maturing about now. And you'll be sitting on a tidy pile of cash, that will have paid off anything you owe - with some to spare.

One reason is that all endowments taken out before 1984 still get some tax relief. The high-inflation, high-interest-rate climate of the 1970s and early 1980s favoured with-profit endowments: in these schemes, insurers pool their policy holders' cash in a range of shares and fixed-interest investments. Each year you get a fixed bonus based on what "profit" the fund's made. And at the end of the term (usually 25 years) there's a hefty terminal bonus. Even the last few years' lower annual bonuses have not dampened overall performance for older policies.

The picture is very different for those who've taken out an endowment mortgage in the last 10 years. Low interest rates, no tax relief on endowments and a gradual removal of tax relief on mortgage interest (Miras) means it makes sense for many to pay off the loan via a repayment deal, rather than an interest-only deal over 25 years.

A survey last weekend suggested that more than 500,000 people may have to "top up" their endowments with an extra pounds 50 a month or more to make enough to pay off their loans. These "top ups" have been triggered by rules changes made by the regulator, the Financial Services Authority (FSA). Until last summer insurers could send out statements showing how much your policy might make if it grew by double digits each year. Most have now reduced that projection, on FSA orders, to 6 per cent a year.

If interest rates rise dramatically or if with-profits funds start to perform better, your endowment will pay out more on maturity. Some in the industry believe things can only get better, and your policy may well pay out a lot more than projections are allowed to show.

The booming market in "second-hand" endowments shows the value that investment buyers, both private and professional, put on such unwanted policies - something the sellers may not always be aware of.

Any potential mis-selling investigation will be focused on the way these contracts have been pushed by commission-hungry advisers. Tony Holland, the Personal Investment Authority (PIA) Ombudsman, believes borrowers have a case for a return of their savings, plus interest, if they were not told that taking out an endowment is intrinsically riskier than a straightforward repayment home loan.

You can see how much salesmen make from these policies by comparing the charges made by a discount broking firm, which doesn't take commission payments. Patrick Connolly, at Chartwell Investment Management, sells endowment policies on an execution-only basis (meaning the firm gives no financial advice) to home buyers for a flat fee of pounds 75. "On endowment policies the big problem is charges - by charging pounds 75 we can re-invest the commission and charge payments into the policy. On a typical pounds 150 a month endowment, that means pounds 1,200 goes back into the policy right away. Typically, on an endowment that money is taken out over the first three years."

People's lives have changed radically since the 1970s, with flexible working patterns, frequent house moves and a high divorce rate. Endowments don't fit into this world. You have to keep paying the premiums for the whole 25 years - or sell up and face a much reduced return.

The Halifax, the UK's biggest lender, stopped selling endowment mortgages in 1995 (it was previously an agent for Standard Life). Bank spokesman Mark Hemingway says: "The word endowment doesn't mean it's a bad thing, but the market- place has moved on and people want flexibility."

It looks like the insurance companies are going to have to dream up something else to sell us in the 21st century.

n The FSA has a leaflet about endowments. Call 0800 917 3311 or you can find it online at www.fsa.gov.uk

NOT WELL ENDOWED

What to do if your policy isn't performing

The insurer may suggest you "top up" premiums. Check if there are any extra charges involved. If so, don't bother. You have paid through the nose already.

Instead of throwing more money into the endowment you could take out a tax-free ISA stock market fund and save that alongside your endowment. Use the proceeds from the ISA to make up any endowment shortfall.

Other options include converting part or all of the home loan into a repayment deal. Then use the endowment as an investment policy. Speak to your lender about how to do this.