Endowing out gracefully

Some endowments have failed to deliver the goods, but they don't all deserve the boot

Former England football manager Kevin Keegan and endowment mortgages have a surprising amount in common. Both were sold to a hopeful public with the promise of riches to come, and both have since suffered public humiliation and failure. The difference is that, while Keegan honourably resigned, millions of homeowners are stuck with their endowment no matter how badly it has performed.

Former England football manager Kevin Keegan and endowment mortgages have a surprising amount in common. Both were sold to a hopeful public with the promise of riches to come, and both have since suffered public humiliation and failure. The difference is that, while Keegan honourably resigned, millions of homeowners are stuck with their endowment no matter how badly it has performed.

Endowments had their heyday in 1988, when some 83 per cent of homeowners chose to pay off the interest on their home loan each month, but put nothing towards clearing the capital. To clear the loan, they invested a regular sum in an insurance company savings plan, hoping it would grow sufficiently to pay off the debt and leave a healthy investment surplus at maturity.

Now some four million households holding six million endowment policies are being sent letters warning they may not have sufficient funds to pay off their home loan at the end of their term. The endowment fund has well and truly waned.

Accusations of mis-selling have further damaged endowments (see box) and by June 2000 they comprised just 19 per cent of new mortgages, according to the Council of Mortgage Lenders.

The humble repayment mortgage has risen in popularity; 47 per cent of mortgage- holders taking the relatively safe and simple option of paying a set monthly amount of interest and capital each month for the lifetime of the loan. At the end of the typical 25-year term, the mortgage should be paid off in full, regardless of how the stockmarkets perform.

So would you be unwise to consider an endowment now - and if you already have one, what should you do?

Mortgage adviser Simon Tyler, managing director of Chase de Vere Mortgage Management, spotted the danger signs early and sold his last endowment six years ago. He had previously sold a number of with-profits endowment policies, but became wary when insurance companies replaced them with more risky unit-linked endowments.

With-profits endowments are safer because they lock in annual gains made on your investment, which cannot be withdrawn even if the stock market falls at a later date. Unit-linked plans are more volatile because returns rise and fall depending on stock-market performance. "We were extremely concerned because most endowments available were unit-linked and had no underlying guarantee, so we stopped selling them."

Nevertheless, Mr Tyler says many older endowments, those sold more than 12 or 15 years ago, have performed well and are likely to more than pay off their home loans. They benefited most from high-growth periods in the late 1980s and early 1990s when interest rates and stock-market returns were high. "People with older endowment policies should ignore the media hype and think very carefully before cashing them in. I spoke to somebody recently who was 23 years into a 25-year term policy with Equitable Life. He was considering dropping it on the advice of a friend, but this would have cost him thousands of pounds in lost bonuses," Mr Tyler says.

He says those with new endowments face a trickier decision: "If you have taken out a policy in the last five or six years with an insurance company that has a poor endowment track record, you should should speak to your adviser. If sold one in the last couple of years, you should ask your adviser to justify why they considered this to be best advice. They may have a good reason, but check."

Some insurance companies have withdrawn from selling endowments altogether, others have zealously defended their record. CIS general manager Martin Clarke, for example, says all its endowment policies are on target to repay their original mortgage amount: "There is no need for any increases in premiums or for alternative funding arrangements to be made; we shall continue to monitor the situation."

Patrick Bunton, senior manager with London & Country Mortgages, would not recommend an endowment mortgage. Most of his customers react to the word "endowment" with horror. "A huge number already hold an endowment and expect a shortfall, or have read terrible things in the press," he says. Repayment mortgages are ideal for those who don't want to take a calculated gamble by linking their mortgage to stock-market performance. Mr Bunton says: "They are the best option for anybody wanting a mortgage without any investment risk attached. If you want to know that the money you owe will be cleared after 25 years irrespective of what happens to interest rates, the economy or equity markets, then this is the mortgage for you."

He says homeowners happy to attach investment risk to their mortgage would be better with an individual savings accounts (ISA) mortgage. ISAs allow you to invest in a mix of stocks and shares, cash and life insurance and take the returns free of cash. A stocks and shares ISA is best to back a mortgage as equities offer higher returns in the longer run.

Mr Bunton says ISAs have advantages over endowments: "They are more flexible, you can increase or reduce your monthly contributions, or pay in a monthly sum, without penalty. If investment performance has been strong, you can stop payments in cash in your ISA to clear your mortgage."