Readers' Lives: Think twice about an endowment

I HOPE to take out my first mortgage in the spring and am considering an endowment mortgage. How can I find out which companies have produced the best returns?

NK, Staffordshire

Many disinterested commentators would urge you to take into account the potential disadvantages of an endowment mortgage. Historically, only a small minority of endowment policies have reached their maturity date. The majority are cashed in early. These so-called surrender values are notoriously poor.

You may have heard of the growing "second-hand" market in endowment policies and believe this will provide you with a safety net. But you would normally have to wait a good few years before a policy has a second-hand value, if indeed it ever does have a second-hand value. And, while the second- hand market may give policyholders a better return than surrendering the policy to the life insurance company, policyholders still don't get the full benefit of the premiums paid in. If they did, second-hand policies would have no attraction to the investors who buy them.

Unless you are certain that you will be able to continue an endowment policy for its full term - typically 25 years - don't consider an endowment mortgage. And who can see 25 years into the future? So many things could happen in your life that may make you want to get rid of your endowment policy.

Consider, too, other disadvantages. Endowments were widely sold in the 1980s on the basis that they would not only provide a lump sum to pay off a mortgage but would also provide some surplus cash. This was based on the assumption that, at least on paper, inflation would generate big "profits". In fact, several years of low inflation have reduced projected returns on investments, and a number of insurance companies are now worried that the investment returns on endowments may actually produce insufficient cash to pay off a mortgage even after 25 years. Some companies have written to policyholders recommending that they increase monthly premiums.

Another problem has been negative equity. On an endowment mortgage you pay only interest to your lender, not capital. But with a repayment loan, you pay off some capital each month. In the early years of a repayment mortgage the actual amount of capital paid off may not be great. Yet it can make the difference between having property worth at least as much as the outstanding mortgage and having negative equity - a property worth less than the mortgage amount you owe.

But if you still want to find out which endowment policies have given the best returns in the past, go to an independent financial adviser (IFA). This is just the sort of commission-based product that many independent advisers are most suited to selling. Ask advisers how they reach their recommendations and what sources of information they use.

Consider buying the advisers' magazine Money Management (available from many newsagents) over the next few months. Money Management frequently does comprehensive surveys of insurance companies' performance.

Finally, remember that most banks and building societies will happily sell you an endowment policy, but also that many of these institutions are "tied agents" - they sell only one insurance company's products and make no pretence of finding the best available policy.

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