Grim future for endowments

Simon Gompertz
Working Lunch

Endowment owner David Griffiths and Simon add up the figures.

There is a new mortgage endowment crisis looming and it is because of the credit crunch.

Endowment policies have started to mature at a breathtaking rate of 50,000 a month, just as the insurance companies which provide them have been marking down their values because of the past year's sharp drop in share values.

Dave Griffiths from Suffolk is one of several Working Lunch viewers who have highlighted the problem.

He was relying on his endowment to provide £20,000 in January to help pay off the mortgage on his Suffolk home.

But the policy has plummeted since the summer.

"Last year I was told that everything was fine," laments Dave.

"A few weeks ago I received a letter from them telling me that I was going to be about £4,500 down."

Dave has worked out that he would have more money if he had simply stuffed his monthly contributions under the mattress.

A short history of endowments

An endowment is a savings plan, usually invested in shares, bonds and property, and which is designed to pay off a mortgage when the loan becomes due for final repayment.

Typically they mature after 25 years.

They became notorious in the 1990s when regulators alerted homeowners that their policies might not do the job.

But now the nightmare is becoming a reality because there is a sudden rise in the number of policies paying out, just as the credit crunch has begun to bite.

Hundreds of thousands will find there is a larger then expected shortfall between the loan and the investment policy which is supposed to pay it off.

Dave Griffiths is part of an endowment "bulge", the result of a period in the 1980s when lenders and insurers started a mad selling spree because of the commissions to be made.

At the beginning of that decade a mere 20% of mortgages were sold with an endowment.

Most of the rest were structured on the traditional "repayment" basis. Homeowners simply paid back a small chunk of the capital each month.

But by 1984, 61% of the mortgages sold that year, or around 650,000, were backed by an endowment. These are the policies due to mature in the coming year.

The endowment selling boom peaked in 1988 at 83% of all new mortgages.

Tough times ahead

Lynda Kennedy, from Foster & Cranfield, which auctions endowments, warns that the next couple of years could be very difficult.

Lynda Kennedy says endowment holders may well be disappointed.

Many endowments sink or swim on the basis of a bonus paid at the end. But she reports that final bonuses are being slashed by as much as 75 per cent.

"I would say brace yourselves: it's going to be a tough ride for some people," Lynda says.

"Your mortgage may not be paid off and you should make every effort now to make allowance for that."

Lynda sells policies for homeowners who have decided not to throw good money after bad.

But once they are close to maturity, the specialist investors who buy endowments tend to lose interest.

In the 1990s, financial regulators told the industry to compensate anyone who appeared to have been mis-sold an endowment with the false promise that their investment was guaranteed to repay their home loan.

So far about £2.7bn of compensation has been paid out.

But because of the recent investment losses, even those who benefited could still discover that the compensation does not go far enough.

Meanwhile, those whose complaints of mis-selling were rejected will have to face the shortfalls without any help.

Look out for a red letter

Over the past few years most people with endowment policies have had warning letters telling them their policy is likely to fall short.

That number is now likely to rise as final payouts dwindle further.

There is a ray of hope, though, for anyone who has only just been warned by their insurance company about a potential shortfall.

Customers who now receive a first "red letter", warning them there is a risk of that the policy will not do its job, have three years to claim compensation for mis-selling.

But take note: aggrieved endowment-holders have to show that they were misled or misinformed about the risks involved with relying on the policy to pay off the mortgage.

It is distressing if the endowment has collapsed in value. However, the collapse on its own does not prove that any mis-selling took place.

Endowments hit by red letters

96% Friends Provident

90% Norwich Union

19% Prudential