Is your mortgage in the red?

Over four million homeowners face shortfalls on their endowment mortgages. What should you do if you are one of them?
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The Independent Online

Do you have an endowment mortgage? If you do, you may already have received one of 11 million letters being sent out by mortgage providers explaining why your endowment may face a shortfall in paying off your home loan. Roughly 60 per cent of endowment mortgage holders are likely to suffer such shortfalls.

Do you have an endowment mortgage? If you do, you may already have received one of 11 million letters being sent out by mortgage providers explaining why your endowment may face a shortfall in paying off your home loan. Roughly 60 per cent of endowment mortgage holders are likely to suffer such shortfalls.

If you were one of the "unlucky million" to receive a "red" letter warning that you will almost certainly face a shortfall, then this week's events will not have cheered you up.

On Tuesday, Britain's top financial watchdog caused consternation among homeowners and consumer groups when it ruled out launching an industry-wide review into the endowment mortgage scandal.

The Financial Services Authority (FSA) said that instead of investigating all 11 million outstanding endowment mortgages, it would be far quicker, cheaper and more appropriate to look into the minority of cases where homebuyers were mis-sold endowments.

What this means is the FSA has left it up to you to decide whether you have been mis-sold an endowment mortgage. It is also up to you to delve into your back drawer, fish out your old endowment policy and construct a complaint against the firm which sold it to you.

Even if you don't reckon you are due compensation, there is a further problem. Strange as it may sound, cashing in or selling an under-performing endowment is the worst possible thing you can do.

In order to help you decide what action to take, if any, we give you the background to the scandal and what you can do about your own endowment.

How did this problem arise in the first place?

In the 1980s, endowment mortgages grew in popularity along with the boom in home ownership. In a high inflation, high interest rate environment, endowments were a good buy. Inflation would whittle away the capital sum that you had to repay on maturity, while high stock market returns would enable the endowment fund to grow rapidly, often leaving you with a bonus on maturity.

In the 1990s, interest rates and inflation both fell to 30-year lows, destroying these two advantages. Low rates of growth in the stock market mean endowment funds now grow far more slowly, so that your policy may not grow fast enough to repay your home loan on maturity.

What is an endowment mortgage?

An interest-only mortgage consists of two parts: a home loan on which you pay interest only, and a savings scheme which pays off the capital of the loan at the end of the mortgage's life, usually 20 or 25 years.

A common way of paying off an interest-only mortgage is by using an endowment policy, which is a savings scheme which includes life insurance. This combination of an interest-only loan and an endowment is called an endowment mortgage. On your bank statement you will see two monthly payments, one being the interest on your loan and the other being the premium on your endowment policy.

What is a repayment mortgage?

A repayment mortgage covers the interest on the loan, and also gradually repays the whole of the mortgage loan by the end of the term.

What do these letters mean, and who is sending them out?

The FSA's advice to endowment holders is not to panic. It has ordered mortgage providers to send all endowment holders "re-projections" of how individual policies are performing, and what shortfalls they might face. The "traffic light" letters are coded green, for the minority who face no problems, to amber, the bulk who might have a shortfall, to red, homeowners whose policies will have to grow by over 8 per cent a year in order to pay off their loans.

Don't worry if you haven't received a letter yet. The industry is half way through the mailing process, with the last letters due to be sent next summer.

For the 1.3 million people who will receive a red letter, the average shortfall will be £12 to £18 a month, which the FSA says is "for many people not too worrying a figure".

All policyholders will also be sent a new FSA guide on how to complain and how to seek compensation. Endowment holders will also receive a review of their mortgage every two years from their lender.

I've received a letter from my endowment company warning me that I face a shortfall. What should I do?

Don't do anything before taking professional advice.

One of the most popular ways to overcome a future shortfall is by switching to a repayment mortgage. If you can afford it, you can also continue paying into the endowment policy and hold onto it purely as a savings scheme until it matures. Remember, an endowment mortgage consists of two, independent parts: the interest-only loan and the endowment policy. There is nothing stopping you keeping the policy on - just view it as long-term savings. Endowment policies enjoy their best rates of growth towards the end of their life, and there is an outside chance you could receive a bonus at the end of it.

Alternatively you can keep your existing endowment mortgage going and, separately, save up enough to cover the shortfall. The most obvious way to do this is to pay into an Individual Savings Account (ISA), which allows you a maximum of £7,000 this year tax free.

If you are approaching retirement, you could opt for a cash mini-ISA. Some pay over 7 per cent, which beats projected growth rates for most endowment policies at the moment. The very worst thing to do is to cash in or redeem your endowment policy.

The first few years' premiums on an endowment go towards paying the advisers' commission, and its trade-in value is likely to be small, relative to the money you have already paid into it. Keep the endowment policy going if you can possible afford it.

Many brokers now offer to buy your endowment off you, but again this is a poor deal as the buyer will enjoy the faster growth of the policy as it approaches maturity.

Don't increase your payments to an existing endowment. Your investment is already not growing as fast as it should, so why pour good money after bad? "Topping up" your existing endowment could land you with more charges. And if the policy has less than ten years to run, you could be hit for tax on maturity.

Don't take out another endowment mortgage. It is surprising how many advisers will offer this as an option. You will just be hit by another raft of hefty commissions and charges.

If you don't want to continue with your existing endowment, or can't afford to continue with the premiums while switching to a repayment mortgage, you can make your policy "paid up". Check for charges which might be incurred when you stop paying premiums. You will continue to earn bonuses from the money invested.

If you are really pushed to increase your monthly payments, you could extend the term of your mortgage instead. The problem with this is that you will end up paying thousands of pounds extra in added interest. This option should only be a last resort.

My policy is forecast to have a shortfall. Does this mean I have grounds for complaint and am I due compensation?

Not necessarily. You need to show that you were given unsuitable advice and have lost out financially as a result.

There are a number of things to look out for which might suggest that you were a victim of mis-selling:

* What was your marital status when you took out the mortgage? Endowment mortgages are a combination of an investment and life assurance. If you are single you don't need life cover, so you probably shouldn't have been sold an endowment. Even if you were married, you may already have had life cover. Was all this pointed out to you at the time?

* Did your mortgage adviser explain that endowment premiums are invested in the stock market, and that there was a risk attached? The salesman should have made it clear there were no guarantees involved in the growth projections provided with the endowment.

One sure giveaway is if your adviser persuaded you to cash in one endowment in order to take out another. This is called "churning", and the only winner is the salesman, who earns commission on each endowment sold.

Was the endowment set to mature after your retirement?

Some people may be able to afford to repay a mortgage in retirement. But if you were assured that the endowment would grow fast enough for you not to worry about still paying premiums in retirement, then you were mis-sold.

If my endowment policy is forecast to show a shortfall, surely I must have lost out?

Not necessarily. This is because, on average, people with endowment mortgages that run for 25 years or more have done at least as well as if they had taken out a repayment mortgage at the outset. The sum built up so far towards repaying your loan will have benefited from strong stock market returns. Whether people with endowment mortgages will, on average, continue to do as well as people with repayment mortgages from now on will depend on what happens to interest rates and stock market returns in the future.

How do I make a complaint?

Step one. First contact the firm (or adviser) that sold you the endowment policy. Your endowment company will have included a helpline number when it wrote to you early in 2000. Firms must have a proper complaints procedure and tell you how to use it. If you bought your endowment mortgage through an independent financial adviser and you want to complain about the way it was sold, then you will need to make your complaint to the firm's compliance officer at its business address.

The FSA guide to making a complaint is available free by ringing the FSA's leafletline on 0800 917 3311. Or click on www.fsa.gov.uk/consumerhelp.

Step Two. If the firm does not put matters right to your satisfaction, you can take your complaint to the relevant ombudsman. The FSA can tell you which ombudsman to approach. The firm should tell you how to contact the ombudsman.

What if the firm that sold me the endowment policy has gone out of business or I can't track it down?

Contact the FSA consumer helpline on 0845 606 1234 for advice on what to do next.

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