Property: Will these loans get you home?

Some endowment mortgages won't realise enough money to pay off the debt. William Raynor investigates: DON'T PANIC ...
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The Independent Online
In recent weeks, as some readers may have become all too painfully aware, one of the most persistent and worrying of the controversies affecting those who borrow to buy their homes has bubbled to the surface again: the one about endowment mortgages.

The sudden shivers of insecurity felt in households up and down the land were triggered by the receipt of letters from certain insurance companies informing holders of some of their endowment policies that, as originally projected, their monthly premiums would now be inadequate for their purpose and would leave a shortfall - a financial hole that would have to be filled.

For the recipients of such unwelcome correspondence, immediate advice can, according to the experts, be summed up by Jonesey's regular admonition in Dad's Army: "Don't panic!" (see box).

The mortgages concerned began in a specific period - between 1988 and 1993/94 - and, in the case of one of the bigger companies, Eagle Star, were not "with-profits" but "unit-linked".

Even so, this company alone sent out 33,000 letters; more than enough, when added to those sent by other companies, multiplied by the membership of each household, and magnified by other endowment-holders who might become anxious, for a seemingly isolated problem to revive a significant public issue.

The issue boils down to a couple of questions. Are endowments good for borrowers? Or are they better for lenders and sales representatives, and therefore a scam?

In 1995, prompted by fears that consumer choice might be "unduly influenced by sales commissions" paid to financial advisers, or by "the profits available to organisations employing" them, the Office of Fair Trading published a report on mortgage repayment methods that found this could well be so. It cited articles, too, in Which?, the Consumers' Association magazine, suggesting "heavy bias in banks and building societies towards the selling of endowment mortgages".

"The more complicated something is," says John Jenkins, the consultant actuary who analysed data for the OFT, "the more chance for middlemen to make money. The conundrum is that the best option for the customer - straight repayment with a decreasing term assurance to pay off the loan if you die - is the one which has not been given priority because it produces least profit for lenders and insurance companies."

Accusing companies of setting charges on endowments to inflate commission and fleece the customer, though, is a different matter and much more difficult to prove.

Again, take the example of Eagle Star, whose problem has been caused, like those of the other companies, by an over-optimistic projection at the outset of the average annual return on premiums invested. Eagle Star says it was obliged to "illustrate" its charges on the policies at "standard industry" rates rather than its own, which it claims were lower. Part of its remedy, therefore, has been to compensate the holders accordingly and so reduce the loading on their monthly payments.

With whatever justification, some companies have placed the whole burden of making up the shortfall on their borrowers. But, says Sue Anderson, of the Council of Mortgage Lenders: "Because most of those who have repaid via endowments have actually ended up with a lump sum, we should take care not to scare people who still have them."

Independent financial advisers now report that sales of new endowments are lagging far behind what Mr Jenkins of the OFT calls "good old-fashioned vanilla-flavoured straight repayments". So far this year 15 per cent of John Charcol's mortgage business has been endowments, compared with 35 per cent repayment mortgages. For London & Country Mortgages, the figures are 10 per cent and 75 per cent respectively. Perhaps the reason is that, with recession fresh in the memory, fewer people are "risk-attracted" and more are now "risk-averse".

As Mr Jenkins says: "A mortgage is an instrument for borrowing money and the aim is to repay it. It is not an investment as such. The more simple it is, like a straight repayment mortgage, the less there is that can go wrong."

What to do if your endowment mortgage falls short, or you're worried it might

IF YOU'VE received one of the letters, says Ian Darby, marketing director of John Charcol, a firm of independent financial advisers, "don't panic. And don't jettison the life policy. If you can afford to, keep it as a 'savings vehicle' and switch your mortgage to straight repayment. Or if the shortfall on your endowment is quite small, either take out a PEP to cover it, or agree to over-pay your monthly interest charges to reduce it".

And if you haven't had a warning yet, but are worried that you might, Sue Anderson of the CML suggests you to seek the "best advice" your lender is supposed to provide under the CML Code of Mortgage-Lending Practice. "Check how your endowment is performing and compare this with the performance anticipated when you took it out. If a shortfall is possible, you can then take steps - like setting money aside in a savings account, or topping the endowment up - to deal with it before it happens. For the vast majority, though, it won't happen, because over a 25-year period, most problems get ironed out."