Guide to Endowment Mortgages

However, of the 8.5 million endowments in existence by 2004, 6.8 million were not expected to clear the mortgage they were intended to pay off. Shortfalls range from a few hundred pounds to tens of thousands.

Thousands of homeowners have campaigned for redress for the mis-selling of endowment products and have won compensation. Many other cases are still to be heard.

So, how did this financial scandal come about?

When endowments first became popular in the early 1980s, inflation and interest rates were high, and you got tax relief on premiums paid to endowments – which seemed like great ways to repay home loans.

But tax relief on endowment premiums vanished years ago, and inflation and interest rates have fallen, hitting investment growth.

Home loan firms and middlemen such as estate agents earned large commissions for selling endowments. The charges tended to be 'front-loaded' – most of them were expected up front - and so you got little, if anything, back if during the first few years you stopped paying the premiums (which were mostly for covering the charges, not building up the endowment).

Poor investment management by insurance companies, general overcharging for the life insurance that was an intrinsic part of the endowment, and high ongoing annual charges eroded any remaining value.

The situation looks like it's getting worse, not better. There is no sign of an upturn in investment returns despite a recovery in the stock market in the past year. On the contrary, some insurers are still cutting payouts.

The scale of the change in investment performance can be seen in this example. In 1998, a 25-year £50-a-month Scottish Widows with-profits endowment paid out £107,292. It now pays less than half that: £49,272.

On average, around half of the total payout on an endowment comes on the very last day. This is the so-called ‘terminal bonus’, which is not guaranteed. Stop paying in before then and you are likely to lose this bonus. Instead, you will get the benefit of only the annual (or reversionary) bonuses added to your policy. Remember only one in three endowments reaches its maturity date, the rest are cashed in early.

Should I cash in my endowment?

You must take independent financial advice before you decide. If you cash in your endowment, you will get back what your insurer reckons it is worth, less charges. Most 25-year with-profits plans give back less than has been paid in after ten years, according to specialist financial magazine Money Management. For example, ten years into a £50-a-month, 25-year Britannic Assurance endowment the policyholder will have paid out £6,000, but would get back just £4,321 if they surrendered it.

If you surrender you will lose your life insurance. While the cost of life insurance has fallen in recent years you could have trouble getting any if you have suffered any serious health problems since you took out your endowment.

Cashing in an endowment does not affect your right to complain for mis-selling.

Should I keep it?

Don’t rely on your endowment to pay off your mortgage. Either change part of your mortgage to a repayment basis - so each monthly payment whittles away at your debt - or make alternative savings.

Don't be tempted to put more money into buying new endowments or to increase payments on existing plans.

You might well be able to cut your current costs by remortgaging to a cheaper loan deal and using the money you saved to reduce your mortgage.

Further information

Check out UK Net Guide’s articles on endowment mis-selling, choosing an independent financial advisor and remortgaging. And have a look at the websites of The Association of Independent Financial Advisers and the Financial Services Authority.