European inflation may add to mortgage crisis

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The Independent Online

While the Bank of England will this week give a few crumbs of comfort to millions of homeowners hit by a deepening endowment mortgage crisis, a leading European banker said yesterday that inflationary pressures were growing on the Continent.

The Association of British Insurers is to produce figures showing that the endowment policies of an increasing number of borrowers will not yield enough to pay off their mortgages. It has recently sent out so-called red or amber letters to 60 per cent of endowment holders, indicating that their policies have no chance of matching the mortgage or that there is a serious risk of their not doing so. The 60 per cent is up from 46 per cent last year. Because there are more than 10 million of these policies in force, that implies that 6 million households are affected by the crisis.

Because these homeowners will have to borrow from elsewhere to make up the endowment shortfall, those at risk will be heartened to learn that this week's quarterly inflation report from the Bank of England will claim that UK inflation remains tamed, suggesting that interest rates will not have to rise until August at the earliest, and some City economists think that interest rates can stay at current levels until 2003.

However, Ernst Welteke, the President of the German Bundesbank and a member of the policy-making council of the European Central Bank (ECB), said yesterday that European wage trends and oil prices could pose an inflation risk on the Continent. "Wages and oil prices hint at inflation risks, so we will be watching developments very closely," he said.

Mr Welteke added that oil prices and wage increases, particularly in Germany, were two potential threats to European economic growth. Others were uncertainty over the US economic outlook and the Middle East crisis, and although inflation had eased in Europe in 2002, it had not slowed to the extent expected by the ECB.

Because of the high level of trade between the UK and the Eurozone countries, such inflationary pressures could be felt in this country, which may make interest rate rises more likely.

This would be greeted with dismay by endowment mortgage borrowers, whose problems have arisen because they are heavily dependent on the bonuses added to their policies.

When endowments were originally used to finance mortgages, the guaranteed sum assured matched the debt and the policyholder kept all bonuses. But, to cut premiums, advisers suggested policies with lower sums assured on the assumption that bonuses would make up the difference. In current uncertain stock markets, those assumptions have proved misplaced.