The fashion victims of lending

Harvey Jones looks at your options if an endowment has let you down

The recent Eighties revival may have worked wonders for Culture Club but it has done little for another symbol of the decade - the endowment mortgage. In the past few months this method of repaying home loans has had as big a hammering as the Poll Tax.

Some thought endowments would suffer the same fate and pass into history. But despite the bad publicity, they may be reprieved. The Financial Services Authority, the industry watchdog, is unlikely to call for an inquiry into the schemes, though some mortgage providers will be criticised for mis- selling them.

Companies that sold endowments without fully explaining that they were more risky than repayment loans have been warned by the Personal Investment Authority that they may have to pay customers thousands of pounds in compensation.

Just 10 years ago endowments were the height of fashion. Around 83 per cent of home buyers taking out a new mortgage opted to repay the interest only and invest regular sums in an endowment to repay the capital at the end of the term.

Most of them would have been looking for a healthy surplus after their loan was cleared. Endowment mortgages were considered so safe that only 14 per cent of borrowers chose to pay back both interest and capital every month. In recent years their popularity has been eroded by low interest rates, underperforming policies and the suspicion that financial advisers were pushing the policies because of the fat commission they earned on sales. Now most mortgages are capital repayment, and this proportion looks set to rise.

But those borrowers who face a shortfall when it comes to repaying the loan because of an underperforming endowment are warned by John Jenkins, chairman of a working party for the Institute of Actuaries, not to take out a top-up policy from their insurer. As many endowments are front-end loading, heavy charges are levied on early contributions rather than evenly spread throughout the term of the policy.

"If an insurer is unable to offer a policy on a low-cost basis then a low-cost individual savings account [ISA] might be a better option," he says.

ISAs are set to be the popular successor to the endowment mortgage. A survey by Newton Fund Managers reveals that three-quarters of financial advisers now recommend ISA loans over endowments.

ISAs are a wrapper for investments such as unit trusts, which aim to deliver stock market growth but within a less rigid structure than endowments. Costs can be lower as there is no front-end charge, which makes them a better option for topping up sluggish endowments.

Philippa Gee, a fee-based financial adviser, says borrowers should tread carefully if their adviser recommends an endowment. "You should ask yourself why they are doing this. Is it for the commission, which can be very high on these policies? Have they discussed any other investment types, or have they only mentioned endowments?" If advisers recommend an endowment, they must provide a quotation which will set out the commission they receive.

Not everybody who already has an endowment mortgage will suffer. Dale Tranter, protection researcher at independent financial adviser Countrywide, says most people will still find that the investment element exceeds projections, and will be left with a surplus after the mortgage has been cleared.

"The overwhelming majority of endowments have paid off the mortgage and left people with a surplus to spend as they like," he says. "My friends and family who took out endowments 20 years ago are now seeing their mortgage paid off and have an extra pounds 5,000 or so on top."

Although a number of mortgage providers have decided to stop selling endowments, some big insurers such as CGU Life say they have no plans to follow suit. CGU Life claims none of its mortgage endowments have failed to reach their targets as charges are spread over the life of the policy instead of making customers pay upfront. The company says its sales are "rigorously regulated" and endowments are still suitable for customers who want policies lasting 15 years or more.

WHAT TO DO IF YOU HAVE AN ENDOWMENT

Don't panic. Contact the financial adviser who sold you the endowment policy - or failing that, the insurance company - and ask for the projected value of your policy at maturity. The chances are it will clear your mortgage. You may even have some money to spare.

n If the situation does look bad, contact an independent financial adviser who has no financial incentive to sell you an endowment policy.

IFAs can suggest ways of investing to make up the shortfall - through an individual savings account (ISA), for example.

n Cashing in your current endowment policy could prove expensive because front-end loading will hit investment returns. If you wish to give up your endowment, consider selling through a second-hand policy dealer who should be able to buy it for a greater amount than the surrender value.

The Financial Services Authority will issue a guide on the sale of endowments in the next few weeks.

However, if you believe you were mis-sold your endowment, the following numbers should help: FSA helpline, 0845 606 1234; Personal Investment Authority Ombudsman, 0207 216 0016.

TERMS EXPLAINED

Endowment policy: a combination of life assurance and investment taken out for a fixed term - usually 10, 15, 20 or 25 years. It pays out at the end of the term or if the holder dies during the term.

n Premium: the regular contribution the investor makes to fund the endowment.

n With-profits endowment: the traditional type of endowment, which pays annual reversionary bonuses into the fund - which the investor retains regardless of future performance - as well as a terminal bonus dependent on overall performance.

n Reversionary bonus: the annual bonus paid on a with-profits endowment. It cannot be taken away once paid, even if the stock market drops.

n Terminal bonus: the final bonus paid on with-profits endowments when they mature.

n Unit-linked endowment: a newer-style fund where the investment is linked to the stock market and will fluctuate alongside share values.