MPs warn over £40bn endowment mortgage shortfall

Millions of mortgage endowment holders are staring at a £40bn shortfall between their policies and the mortgages they were supposed to pay off, according to a report published by a committee of MPs today, which says many policies were mis-sold.

Millions of mortgage endowment holders are staring at a £40bn shortfall between their policies and the mortgages they were supposed to pay off, according to a report published by a committee of MPs today, which says many policies were mis-sold.

The damning findings of the report by the Treasury Select Committee show 80 per cent of the 8.5 million mortgage endowment holders have policies that are unlikely to pay off their mortgage. The average shortfall is £5,500, according to the MPs, and the situation is likely to worsen as more policies mature.

"They were products based on pumped-up promises, not on a sound assessment of risk," James Plaskitt, a committee member, said yesterday. The MPs concluded that about half the customers believed they were mis-sold their policy by salesmen who were driven by commission and who did not spell out the dangers. "In selling low-cost endowment mortgages the industry often failed to provide homeowners with a suitable product for their circumstances or a product that was fit for the purpose it was being used for," the report says.

Low-cost endowments became popular in the 1980s, and at their peak accounted for 80 per cent of all mortgages. The product allowed borrowers to repay the interest on their loan to the mortgage lender, and set aside monthly payments in an endowment policy that would provide a lump sum to repay the loan itself at the end of the term.

The endowment was supposed to give policyholders a windfall after repaying the loan but, as interest rates fell in the 1990s, investment returns also dropped, making it unlikely that many policies would actually pay off the mortgage.

The report says insurers did little to warn customers of the impending problem. "The industry is still locked in to an unacceptable culture that focuses upon short-term sales rather than long-term care. The commission structure rewards potentially inappropriate sales practices and pays no heed to the investment performance of the product," it says. Many of these letters invited policyholders to top up payments to bring the policy back on track, but MPs said this was bad advice. "To the charge of mis-selling the product, we must now add that of misleading the customer. Red letters were a call to put good money after bad," Mr Plaskitt said.

Despite the shortfall figures, only 6 per cent of customers have so far complained about their policies, according to the committee report. More than £670m has been paid in compensation, £227m of which was through disciplinary action brought by the FSA and £447m paid voluntarily by companies. Insurers are upholding between 50 and 90 per cent of complaints that are lodged, as many admit to having poor records of sales, and new guidelines require companies to give customers the benefit of the doubt.

"The cost of compensation does fall on other policyholders," a spokesman for Legal & General said yesterday. "But the spirit towards complaints is one of help and we are trying to be positive about it. There is a danger that complaints numbers could soar and we wouldn't have the resources to deal with them." It has recently doubled its reserves for settling mortgage endowment complaints.

The MPs, however, said more needed to be done to improve the complaints process. The Financial Ombudsman Service settles cases when customers are not satisfied with the offer given to them by the insurance company. It is upholding more than 50 per cent of claims, which MPs said was evidence that company procedures were still poor.

The insurance industry argues that policy shortfalls have been offset by a steep rise in house prices over the period and low interest rates. "Holders of endowment mortgages are paying much lower interest charges - in many cases these savings more than cover what needs to be put aside to make up the shortfall," Mary Francis of the Association of British Insurers said yesterday.