Homebuyers fresh endowment woe

Will your endowment pay your mortgage?

More homeowners than first thought are likely to face an endowment shortfall.

A potential change to the way in which many insurers calculate how much an endowment policy will be worth at maturity could spell trouble for thousands of UK homeowners.

In a bid to stay solvent insurers have switched from investing in shares to bonds but the Financial Services Authority (FSA) has warned that this could mean lower growth for endowment policyholders over the long term.

Tens of thousands of homeowners have already been warned that their endowment policy will not be worth enough to pay off their mortgage debt.

Ever since endowment mis-selling first came to the public eye in the late nineties insurers have been duty-bound to regularly update endowment customers as to how their policies are performing.

Red letter day

Policyholders are told whether they are likely to suffer a shortfall in a series of colour coded letters.

A red letter means a likely shortfall, amber and the investment could go either way while green means that at present the investment is on course to pay off the mortgage debt.

The insurers calculations are based on rates of investment return set at 4%, 6% and 8%.

But the stock market falls of recent years have meant that many insurers have shifted from shares to safer investments such as bonds.

According to the FSA, the city watchdog, insurers could be missing out on the historically high long term rates of return offered by shares.

As a result, the FSA believes that insurers which shun shares in favour of bonds could be well advised to lower their estimates of how much an endowment policy will pay at maturity.

The watchdog has written to insurers to remind them that they should act responsibly when giving policyholders a projection.

Projection rates are also used by firms to give consumers illustrations of potential future returns from other investments, such as pensions and ISAs.