Mortgaging your life away

A few years ago, one of the hardest questions to answer when buying a home was whether to opt for a repayment or endowment mortgage. The challenge today is to find a lender willing to provide a home-buyer with an endowment mortgage.

A few years ago, one of the hardest questions to answer when buying a home was whether to opt for a repayment or endowment mortgage. The challenge today is to find a lender willing to provide a home-buyer with an endowment mortgage.

The UK's largest mortgage lender, the Halifax Bank, ceased offering endowments in September 1999. The second largest, the Abbey National, stopped them at the end of 1999 due to low demand. And the largest building society, the Nationwide, also abandoned them in December 1999, when they fell to just 2 per cent of new mortgage products, and it was no longer cost-effective to give staff training and compliance procedures to support endowment sales.

Of course, the spur to dwindling consumer interest in endowments was the mis-selling that occurred over many years, and the horror stories of home buyers left with thousands of pounds outstanding on their loans when their endowments matured. This has been especially true for holders of with-profits - as distinct from unit-linked - endowments, which have recently under-performed badly.

But will endowments ever be a suitable product? "No, we would say," suggests Halifax's spokeswoman. The same response comes from Donna Bradshaw, a director of the independent financial advisers Fiona Price & Partners. "No," she answers. "If you are looking at an interest only mortgage we would suggest an ISA mortgage because of the tax advantages and lower charges."

Others take a more cautious view, remembering that, for many years of high inflation, endowments represented a very good buy indeed. And should those circumstances ever return then endowments (like ISA mortgages) will again prove to be good value. One question is whether we can now be confident that our economy is locked into permanently low inflation. Martin Baker, editor of www.myendow ment.com, urges holders of endowment policies not to panic. He thinks there may be occasions when new endowments can represent a sensible option. "When they were being sold 15 years ago, it was always a bit like monopoly money," Mr Baker says. "Pay for your mortgage and walk away with a lump sum - with high rates of inflation and high investment returns it was a fantastic thing. If those times return, endowment policies should do well."

Ray Boulger, senior technical manager with mortgage broker John Charcol, says that endowments are still sometimes worth considering. "About 2-3 per cent of our cases are endowments. They can be suitable for a minority of clients. The key question is the attitude to risk.

"If you want a mortgage based on investments then you are limited to an ISA, endowment or a pension-linked mortgage. The issue is whether it should be an ISA or an endowment, because a pension mortgage is only suitable for a small minority.

"With the problems of with-profits endowments now recognised, any person interested might be better looking at unit-linked endowments, and the ISA may be better and may have tax advantages. But if someone wants an investment-based mortgage and wants life cover and critical life cover and if you add these to an endowment then it works out significantly cheaper, especially if you are aged over 35," says Mr Boulger.

The key is to be well-informed, as the Association of British Insurers recognises. Spokesman Malcolm Tarling says: "The Financial Services Authority has said that endowments might be suitable for some people, perhaps those who are more aware of the risk factors involved. Endowments don't involve a guarantee - although a couple of companies [Standard Life and CGNU] have said they will honour a guarantee on these. The main thing is to get independent financial advice."

This is equally essential for people who have already received warning letters from product providers, indicating that their endowments may not fully pay off their mortgages. These are classified as red or amber (green is the all-clear), according to the level of risk of performance undershooting the loan balance.

The providers have been instructed by the FSA to calculate likely future performance on the basis of recent growth - and show a range of possible outcomes at 4, 6 and 8 per cent growth. This is intended to emphasise that the actual outcome is difficult to predict.

Most mortgage advisers will tell borrowers that their best option is likely to be to take out an additional investment policy, rather than cancelling their current endowment. Indeed they are frequently frustrated at clients coming for advice only after they have already surrendered or sold their endowments.

"They don't realise they are starting all over again," complains Steve Herbert, a partner at Select Mortgages and Loans. "Every second person who phones now is either looking to reduce their endowment or looking to replace it. While I am perhaps against endowments for the future, I am also against cancelling them now."

Even Surrenda-link - which sells endowments at a higher return than their surrender price from the issuer - advises policyholders to seek advice before disposing of their endowments. "We always suggest that if in doubt seek independent financial advice," says Matthew Roche, Surrenda-links' spokesman. "The FSA urges people not to rush into surrendering their policies."

Holders of existing endowment policies should remember that today's problems were caused by sellers providing inadequate advice - too often motivated by high rates of commission.

It is a sad irony if those victims now rush to dispose of endowments against their interests, or because they fail to seek independent advice.