With-profits wisdom: Borrowers must look carefully at performance when choosing endowment mortgages

MOST people shop around on interest rates when they are looking for a mortgage, but consumers should also be aware that there are vast differences in the performances of the with-profits endowments sold by leading building societies to pay off loans.

For instance, the UK's second-biggest building society, Nationwide, is tied to Guardian, formerly GRE, the bottom- performing life office.

Anybody who took out a pounds 50-a-month, with-profits policy at Guardian 25 years ago would have seen their total pounds 15,000 investment grow to pounds 73,961, about pounds 37,000 below the top performer, according to a survey by Money Management. Guardian no longer sells with- profits policies.

Other top 10 societies are tied to better-performing offices. Woolwich is tied to Sun Alliance, which is just outside the top 20 performers; Skipton to General Accident; Bristol & West to Eagle Star; Alliance & Leicester to Scottish Amicable; Leeds Permanent to Norwich Union; and Northern Rock to Legal & General.

Anyone fortunate enough to have bought a with-profits policy with a top-performing life office 25 years ago would now be looking at an annual yield of more than 12 per cent.

This cash bonanza is unlikely to be repeated for policy- holders with contracts maturing in the future, as yields are expected to fall in coming years.

Total investment of pounds 15,000 - pounds 50 a month for 25 years - would now be maturing with a value of more than pounds 100,000 on policies from 14 of the 47 with- profits companies, according to the survey.

Fifty pounds a month invested over 25 years in an average building society would now be worth pounds 42,835; invested in an average UK unit trust it would be worth pounds 138,774.

This year, Tunbridge Wells gets to the top of the league tables for the first time, knocking General Accident into second place. Scottish Amicable, Clerical Medical and Legal & General have dropped out of the top 10, replaced by Axa Equity & Law, Scottish Mutual and Wesleyan Assurance.

Overall, over the past few years the maturity values on both long-term and short-term policies have been falling, and life companies expect this trend to continue for some years.

The exceptionally good performance of the UK stock market last year meant that the drop was not as severe as it could have been.

Policy-holders are given two types of bonuses on their policies. During the life of the policy annual bonuses are added each year. This reversionary bonus is expressed as a percentage of the sum assured - and once it is given to the policy- holder it cannot be taken away.

A policy-holder is also given a terminal bonus when the policy matures, which depends on investment performance of the fund and is not guaranteed. This makes up between 28 and 64 per cent of the final pay-out.

Maturity values on policies are still falling despite booming markets, because during the late 1980s and early 1990s life companies continued to give their policy-holders high bonuses without the investment returns to back them up.

Norwich Union predicts that yields will continue to fall on 25-year policies for two years, on average by about 0.6 per cent. It believes that yields on 10-year policies will fall more steeply - from about 12 to 8.5 per cent over the next two years. Despite the falling maturities, consumers should not cancel their policies, as there is a high financial penalty.

John Jenkins, a consulting actuary with Clay & Partners, believes that the cuts currently being inflicted on short-term policies could mean that some people planning to use these policies to pay off mortgages could face a shortfall.

He said: 'For a very small number of policy-holders this could be a problem. Before maturity it would be sensible for the companies to write to policy-holders to suggest possibly increasing premiums.' He said that in some cases the premium increases could be as high as 25 per cent.

Royal Life wrote to 24,000 low-cost endowment policy- holders last week warning them that their policies might not pay off mortgages at the end of term. However, the company says that no immediate corrective action needs to be taken.

Some companies have managed to buck the trend and increase the maturities of their 25-year policies.

Scottish Mutual has increased its 25-year payout by a staggering 14 per cent. The company was able to do this because pounds 285m was injected into the with-profits fund when the company was taken over by Abbey National.

This resulted in a one-off payment to existing policy- holders and also allowed the fund greater freedom of investment.

Another company which managed to increase payouts on all policy terms was Sun Alliance. On 25-year policies it managed to increase the payout by pounds 4,888 to pounds 89,319.

(Table omitted)