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Last Updated: Wednesday, 21 April 2004, 17:58 GMT 18:58 UK
Endowment mortgages: Have you acted yet?
By Anna Bradley
Director of Retail Themes, Financial Services Authority

Anna Bradley

If you are a homeowner you are unlikely to have missed widespread press coverage about the 'mortgage endowment time-bomb'.

Around 3.5 million households face the prospect of not being able to repay their mortgages because they are relying on endowment policies that won't generate enough money to cover the loan.

An endowment policy is an investment product that is intended to grow enough to repay the amount you borrowed by the time you reach the end of the mortgage term. Most funds invest in the stock market.

But because investment returns have been poor in recent years, many endowments will not have increased in value sufficiently to repay the mortgages secured on them.

If you are worried that your endowment won't pay off your mortgage... act now
Anna Bradley
The amount needed to make up the difference is known as a "shortfall".

It is estimated that nearly 7 million mortgage endowments policies are being relied on to repay a mortgage. Around half of those run the risk that, if no action is taken to address the expected shortfall, then borrowers could face a large debt or risk losing their home.

This warning comes at a time when more "re-projection" letters from endowment companies are being sent to homeowners updating them on whether their own policy faces a shortfall.

So far, everyone with a mortgage endowment has now received at least one such re-projection letter. Most have received two or three.

Taking action

If you are worried that your endowment won't pay off your mortgage then you should look at your options and act now. Some people say that they don't want to do anything yet because they think that things will get better in the long run, but it's a big risk to take. If you do not act now you may risk losing your home.

So what steps can you take to avoid future problems?

1. Don't ignore it. Things could get worse if you don't act now.

2. Consider your options. What steps can you take to make up the gap?

  • Switch the amount of the projected shortfall into a repayment mortgage;
  • Ask your lender to convert your whole loan from an interest only to a capital and interest repayment loan;
  • Repay part of your mortgage early if possible;
  • Start an additional savings plan to make up the shortfall;
  • Extend the term of your endowment policy and loan; or
  • Top up your endowment plan.

3. Speak to your lender. If you have a problem in making up the extra cash needed to cover the possible shortfall, don't just do nothing.

Financial Services Authority (FSA): Fact sheet "Your endowment - have you acted yet?" available on its website (see link on right), or by calling 0845 456 1555
Financial Ombudsman Service (FOS): Fact sheets on its website (see link on right), or contact its helpline (0845 080 1800)
Financial Services Compensation Scheme (FSCS): Information on making a claim and Q&As on website (see link on right)

Contact your mortgage lender and discuss the situation with them. They may be able to help in variety of ways - for example, by extending the mortgage term.

4. Take advice. If you are uncertain about what options you should take think about speaking to a financial adviser. You may be charged for this service but it could be well worth it in the long run.

5. Protect yourself. Endowments usually come with life insurance. If you do decide to move to a repayment mortgage, you may well need to buy separate life cover.

6. Don't delay if you need to complain. If you think you were been badly advised when you bought your endowment you should make a complaint don't delay.

If you delay, you could lose the right to some or all of any compensation that may be due to you (complaints may be rejected if they are made more than three years after you became aware of the problem, usually by receipt of a reprojection letter showing a high risk of shortfall on your endowment).

So the key message is that if you are worried that your endowment will not repay your mortgage the most important thing is to take action (or seek advice on what you should do) without delay.

The sooner you start to cover the shortfall the less painful it will be.

For more information on mortgage endowments and how to complain see the Financial Service Authority's link on the right.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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