Outlook: Endowment fiddle

MOST PEOPLE already knew that on the whole it doesn't pay to take out an endowment mortgage, but that hasn't stopped the Faculty and Institute of Actuaries spending long months analysing and crunching the figures to come up with the shock horror conclusion that, er, on the whole it doesn't pay to take out an endowment mortgage.

To be fair on the actuaries, it is apparent from the figures that quite a lot of people don't know this, despite the adverse publicity that has surrounded these products since the early 1990s, when mortgage lenders first started writing to borrowers warning that their policies might show a short fall. Approximately a third of all mortgages sold continue to be endowment based.

Of course, endowment mortgages aren't always the wrong approach in all circumstances. Long -term endowment mortgages of 20 or 25 years can be good value provided the charges are competitive. But anything shorter, and you are more likely to be better off with a simple repayment mortgage.

According to the actuaries, this is more so today than ever. Endowments work on the principle that it is better to have your money earn a cumulative rate of return on your own behalf in the stock market than pay it back to the lender in the early years. In this way the capital will be working for you, not the lender, and if there is eventually a surplus, then it will be yours. This seemed to work OK in relatively high periods of inflation, but with today's very low rates of return, it is much more problematic. Most endowment mortgages are these days simply a device for generating commission, both for the lender and the policy provider. Mis-selling of such mortgages remains widespread.

However, the actuaries are sensibly against regulating such products out of existence altogether. Given the potentially higher rewards available through endowments, it plainly suits some customers to accept the higher risk. Instead, the actuaries suggest that mortgage buyers apply a simply criterion; endowments should only be considered if there is a reasonable likelihood of being better off than with a standard repayment mortgage. Great in principle, but how is this established?

The actuaries suggest applying a rate of return assumption of 6 per cent per annum and from that calculating a maximum level of charges that can be used to justify the policy. If higher, then forget it. This sounds an excellent benchmark principle and the sooner it is applied on an industry- wide basis, the better.