As over 2m endowments mature in next five years, be ready for a MORTGAGE TIMEBOMB

Published 04th Mar 2010

Millions of homeowners are sitting on a mortgage timebomb that is set to detonate within the next five years as endowment payouts slump again.

Between now and 2015, an estimated two million endowment policies will mature and some companies admit just one in every 100 is on target.

The boom years for endowment sales were 1988 to 1993, when up to four in every five homebuyers were sold one.

Tempting figures dangled in front of borrowers suggested that by saving just £50 a month they could reap a return of more than £100,000.

Graham and Alison Heath took out a low-cost endowment with Eagle Star in 1988, which was due to mature in September 2013. The policy was way off target to cover the £130,000 mortgage. Commercial property consultant Graham, 62, from Monmouth, Wales, says: 'Last November, we discovered it was worth around £50,000, only £3,000 more than we have paid in over the past 21 years.

We were sold this endowment on the understanding it would pay off the mortgage and provide a surplus, but instead it is forecast to have a shortfall of around £80,000.'

He and Alison, a nurse, cashed in their policy with a minimal bonus and sold the house to pay off the mortgage - buying a three bedroom detached cottage with the proceeds.

A spokesman for Zurich, which now owns Eagle Star, says: 'The impact of the challenging economic climate over the last few years has been difficult for many investors and has resulted in shortfalls for a significant number of Eagle Star with-profits endowment customers. We've written to those affected on an annual basis notifying them of any projected shortfall and strongly recommending they seek financial advice.'

But since the start of the century, payouts on a typical 25-year policy have nose-dived to a pitiful £30,000. A 2008 report quoted the average shortfall as £7,200. With values having fallen since then, experts say today's average shortfall is closer to £10,000.

Predictions from the City regulator suggest as many as 100,000 policies face a £20,000 plus shortfall. Standard Life, whose endowments were sold by Halifax, estimates that 97 pc of the 46,000 policies maturing this year will fail to meet their target.

Scottish Widows, part of Lloyds Banking Group, says 97.6 pc will not come up to scratch.

Last week Prudential, one of the strongest with-profits companies, revealed that its payout on a benchmark 25-year, £50-amonth policy maturing in February was £35,834, down from £37,738 for a similar policy maturing a year ago.

At Scottish Amicable, owned by the Pru, the payout is down from £38,707 to £37,635.

The reduced payouts echo those at insurers Aviva (which includes Norwich Union and General Accident and Commercial Union), Clerical Medical, Legal & General and Standard Life.

Prudential now estimates that 75 pc of its endowment policies will fail to meet the target. Last year, it said just 25 pc would fail and two years ago 19 pc. And Pru looks good compared with the rest of the industry.

There is worse to come because the zombie funds that are closed to new investors have yet to produce their results. Last year, the worst included Life Association of Scotland, which paid out just £23,785.

At the peak, there were 11 million mortgage endowments but many have matured or been cashed in, leaving 4.9 million still active.

In the boom five years from 1988, 2.1 million homeowners signed up to interest-only mortgage deals, with the vast majority relying on an endowment to pay off the debt.

Many homeowners have taken no action to plug the hole in their mortgage. But with payouts plunging again, even those that have may be in trouble.

And with mortgage rates expected to rise from this year, overpaying to make up the shortfall will become harder.

High Street banks and building societies encouraged buyers effectively to gamble their home on the stock market, because they were being paid massive commissions by insurance companies to flog policies.

With-profits endowments were supposed to build up a pot of money, usually over 20 to 25 years, by adding bonuses each year to the money saved plus an extra big lump sum at the end.

Homeowners were told this would smooth out any erratic stock market movements and not only repay the mortgage but give a lump sum on top.

For most people it's too late to complain because you have only three years after the insurance company has told you about a potential shortfall.

But if your endowment has only just gone into the red then you can make a complaint against the firm that sold it. You could, for instance, complain if:

• You did not know there was a stockmarket risk;

• You were single at the time and did not need the life insurance that is part of an endowment;

• You already had life insurance elsewhere covering your mortgage;

• The endowment matures after you retire and the adviser did not check you would have enough income. Insurers also have to give you six months' warning before the time-bar comes down.

In a 2005 report, the Association of British Insurers, the mouthpiece of the insurance industry, made the bizarre argument that since these endowments were sold, house prices have risen sharply.

Between 1988 and 1993, average prices varied between £60,000 and £70,000. Today, the average property is £165,000.

But it is mortgage size that is the crucial factor and not property value.

If you have an endowment shortfall, you've got limited options:

• Extend your mortgage term to repay the shortfall if you are still working;

• Pay extra to your lender or swap to a full repayment mortgage while interest rates are low;

• If you are retired, consider equity release. You'll be signing away part of your home and interest roll-up until you sell or die;

• Downsize to a cheaper property;

• Use any rainy day savings.

Source: ' Daily Mail '

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