Endowments black hole hits £40bn

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As many as eight out of 10 endowment mortgage holders are facing a shortfall on their policy due to a catalogue of failings by providers, MPs have said.

As well as facing an average shortfall of £5,500, 60% of policyholders could have been victims of mis-selling, the Treasury Select Committee report added.

Overall, that adds up to a black hole of £40bn.

At least 8.5 million endowment policies - funds used to pay off home loans - are still in force.

'Perverse' fees

MPs said many policyholders on lower incomes were now left in an "advice vacuum", not knowing which way to turn.

ENDOWMENT FACTFILE 8.5m policies still in force; 4.5m policyholders are still relying on endowments to pay off their mortgage Five firms have been fined £5.2m, and £670m compensation paid Around 80% of endowment policies are now unlikely to meet their target Average shortfall across policies is £5,500, adding up to £40bn overall 2013 will be the peak year for endowments reaching maturity Just 5% of new mortgages taken out in 2002 were endowments Q&A: Endowment shortfalls Useful contacts

According to the House of Commons report some people may be forced into selling their home if they fail to act, with the elderly particularly at risk.

Yet most companies were still charging full fees, MPs said.

The influential committee is calling for immediate action by the City regulator and the industry.

In particular, it wants existing time limits on complaints to be extended, and better basic financial advice for people facing shortfalls.

The Association of British Insurers (ABI) said it would be revising its code of practice and working on better and more abundant information to "ensure customers receive the best possible information".

Endowment woes

Endowment mortgages grew rapidly in popularity in the 1970s and 1980s.

In 1970 they accounted for just 7% of the market. In 1988, when sales peaked, 83% of mortgage sales came within an endowment.

There are 8.5m endowment policies still in force. About 4.5 million customers, holding 6.8 million separate policies between them, are still relying on their endowment policies to pay off their mortgage.

With an endowment mortgage, the home buyer repays only interest on the loan and makes a separate payment into an endowment policy - a type of life assurance investment product.

The consumer then hopes that when the endowment matures it will deliver that will cover the whole of the bank or building society loan and possibly leave something left over as a capital windfall.

Mis-selling

The report also estimated that between 50 and 60% of people could have been mis-sold a policy.

I was told that it could pay off a mortgage and provide a tidy lump sum at maturity John Rouse, endowment holder Read a victim's story Send your experiences

In many cases consumers purchasing an endowment mortgage were left with the impression that the policy was guaranteed to pay off the mortgage.

But the policies were far from guaranteed and were "probably unsuitable for many homebuyers", the report concludes.

John Rouse, 54, of Chesterfield, is one such victim.

He is now "devastated" to be facing a £20,000 shortfall on an endowment taken out to cover a £65,000 mortgage.

He told BBC News Online: "Endowments just seemed the way to go, everyone seemed to have one. When your house is on the line you assume that the guarantees on offer are copper bottomed."

The committee's report also expressed regret that only 6% of policyholders had so far claimed compensation.

"Urgent action is needed to ensure that the complaints process is better understood and more accessible to policyholders," it warned.