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 ...

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."

Start your day with The Independent, sign up for daily news emails
Keith Fraser says we should give Isis sympathises free flights to join Isis (AFP)
Life and Style
Google celebrates the 126th anniversary of the Eiffel Tower opening its doors to the public for the first time
techGoogle celebrates Paris's iconic landmark, which opened to the public 126 years ago today
Cleopatra the tortoise suffers from a painful disease that causes her shell to disintegrate; her new prosthetic one has been custom-made for her using 3D printing technology
newsCleopatra had been suffering from 'pyramiding'
Arts and Entertainment
Coachella and Lollapalooza festivals have both listed the selfie stick devices as “prohibited items”
Nigel Owens was targeted on Twitter because of his sexuality during the Six Nations finale between England and France earlier this month
rugbyReferee Nigel Owens on coming out, and homophobic Twitter abuse
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor