Endowment mortgages: Legacy of a scandal
Nearly 25 years ago, Christine Taylor took the plunge and bought the first and only house she has ever owned.
Now, more than two decades on, she admits that paying off the resulting debt has been a constant worry.
That is because she was sold an endowment mortgage - a monthly savings plan, usually invested in shares and property, which was designed to pay off the home loan at the end of the term.
Like millions of other home buyers, she was also told that the policy might bring her a nice lump sum when the endowment matured after 25 years. In her case, the surplus was expected to be at least £10,000 in August 2013.
"I hadn't any fancy ideas about going on a spending spree," says the 55-year-old.
"I just thought I would be comfortable, with the mortgage paid off."
As it is, Mrs Taylor is among the hundreds of thousands of people who will receive final confirmation this year of a shortfall in the expected payout of the endowment.
"I've been struggling to get my mortgage down, but I'm glad we chipped away at it," she says.
"There will be people in a lot worse situation than I am."
The rise and fall of endowment mortgages has been a feature of one of the most notorious mis-selling scandals in the last few decades.
The industry grew as a result of tax breaks, and hit its peak towards the end of the 1980s when it became the fashionable home loan for those getting on the property ladder. The estimated peak was more than a million policies sold in a single year.
The extent of the subsequent decline is clear from the fact that only 27 sales of this product were completed in 2011-12, according to the City watchdog, the Financial Services Authority (FSA)
At the end of the 1980s, there was a boom in both the housing market and stock market, prompting those selling these products to make very high predictions of investment growth in endowment savings plans.
By the middle of the 1990s, it became obvious that these expectations were overblown.
"The original growth estimates on these policies were simply way too optimistic, while the funds just didn't perform as expected," says Phillip Bray, of independent financial advisers Investment Sense.
"In the coming years we'll see just how bad the endowment mortgages mis-selling scandal is."
In the late 1990s, regulators told insurance companies to write "traffic light" warning letters to policyholders to explain the level of shortfall that might occur. A "red letter" meant there was a high risk of the policy paying out less on maturity than the target amount.
Many thousands of people cut the link between the endowment and their mortgage, making alternative plans to pay off their home loan with other savings, investments, or a tax-free lump sum from their pension. Others have switched their mortgage to a repayment model.
But Steve Wilkie, managing director of Responsible Equity Release, says his business sees many older people who have not made any plans and may need to downsize where they live.
They are receiving letters asking them how they intend to pay off their mortgage, so suddenly the poor performance of their endowment has become a critical matter.
One issue to their advantage, he says, is that the value of their property has often risen, so there is sufficient equity in the home to pay off the loan, if they choose to sell.
This, clearly, is not the scenario many of these people would have wished for. They wanted the mortgage to be paid off and the property owned outright, ready for their family to inherit in due course.
There are other options for those facing a critical point in their finances, who face a shortfall, and who have not decoupled their endowment and their mortgage, according to Danny Cox, of financial advisers Hargreaves Lansdown.
He suggests people can switch to a repayment mortgage, or part endowment and part repayment - although they should check with their lender that there are no penalties or costs for doing so.
Others may consider cashing in their endowment and using the proceeds to pay down the mortgage, before paying the rest through a repayment method. Again there might be penalties, and there is a judgement to be made here over the future performance of the endowment.
Alternatively people could switch to saving in a more tax-efficient product such as an Individual Savings Account, rather than an endowment.
While considering what to do next, many people who were sold endowment mortgages and face a shortfall might feel somebody else was to blame.
But they could face fresh disappointment because of a deadline on claiming for compensation for any apparent mis-selling.
Policyholders can make a claim to the Financial Ombudsman Service if they believe they were mis-sold the policy, and their endowment provider turns down their claim. Grounds for complaint may include:
- Not receiving a full explanation that there could be a shortfall at the end of the mortgage term
- Being told that the endowment would definitely pay off the mortgage
- The fees and charges were not explained
- An adviser did not complete an assessment of finances and attitude to risk
- Sales staff failing to ensure that income was available if the policy ran into retirement years
- Receiving advice to cash in an endowment and being sold another
These rules led to complaints to the ombudsman about mortgage endowments totalling nearly 70,000 a year at their peak in the middle of the last decade.
The latest figures show that 2,109 complaints were made between April and September 2012.
However, about half of all the complaints received by the ombudsman are turned down because of a deadline. Claims must be made within three years of the householder realising that the policy was mis-sold.
That date is generally taken three years from the point at which policyholders received their red warning letter from their provider.
Time, it seems, has dealt these people another blow.