Endowment Mortgages

by Mark Johnston

Endowments were most commonly sold in the eighties and nineties. These complicated financial products combine life insurance and investment growth in one single package.

With this particular product borrowers do not repay any of the capital they borrow during the term of the loan. Instead, the policy should grow to then produce a lump sum large enough to repay the mortgage in full at the end of the pre-agreed period, which was usually 25 years.

There are around 10.2 million endowment backed mortgages still in operation and these cover around 7.5 million properties. The reason so many people bought these policies was that home loan firms and estate agents earned large commissions for selling them.

In the early eighties, when endowment policies first became popular, inflation was roaring and interest rates were high. These policies were however sold on optimistic promises, based on a booming stock market.

There has never been any guarantee that the endowment policy would pay off the mortgage and shortfalls have become a fact of life now for an increasing number of policy holders.

This is particularly apparent in the current climate where inflation and interest rates have fallen dramatically, hitting investment growth hard.

New research has shown that around 70,000 home owners can this year alone expect a shortfall on their endowment policies.

However the Association of British Insurers (ABI) recent research suggests that the figure of policies that are in trouble is more likely to be 6.2 million.

The Financial Service Authority (FSA) has demanded that all firms write to their policy holders each year to let them know exactly how their policies are progressing.

Therefore millions of people are being sent letters warning them of likely shortfalls. Lending firms say they are sending a second round of letters, although the first were issued in 2000 to 2001.

Payouts on endowment policies have been falling for years and now it seems a third of a million families may be forced to sell their homes this year as their policies fail to deliver.

Data shows that in just 5 years payouts on policies have fallen by as much as 44%. Therefore many home owners are now seeing their endowments fall by up to £100,000 short of what they were originally promised.

Patrick Connolly, from independent advisers AWD Chase De Vere, said “payouts have fallen over the past few years and this is likely to continue”.

Aviva, one of Britain’s biggest insurers, has 71,000 endowments policies due to mature this year and they estimate some 70,290 will fail to pay out enough to cover the policy holder’s home loan.

A spokesman for Aviva said “we have been through poor investment periods in the past 5 years and this is reflected in the payouts”.

Standard Life also has 106,000 endowments maturing this year and of these nearly 104,000 or 98% will show a shortfall.

Two years ago Norwich Union promised to make up any mortgage shortfalls in their policies, but that now looks unlikely as the company’s investment record has been so poor any money they had allocated to do this will now not be sufficient.

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