Policies 'cannot pay home loans'

Thousands of mortgage borrowers may have to pay extra premiums on their life endowment policies because of concern that the policies will not produce enough money to pay off the loans.

Two of Britain's leading building societies, the Nationwide and Leeds Permanent, are urgently trying to identify borrowers who face this predicament. Although only a small minority of the total, the number of borrowers affected could run into thousands.

Both the Nationwide and the Leeds operate highly conservative lending policies. Those with more lenient lending criteria could face far greater problems. Concern has mounted following widespread cuts in the annual bonuses which life insurance companies pay on their 'with-profits' policies. This has meant that, in the case of some shorter-term policies taken out in the last few years, the projected total of annual bonuses will not be sufficient to cover the mortgage.

The Leeds, which sells the endowment policies of Norwich Union, traditionally one of the highest paying life offices, expects to clarify the size of the problem in the next 10 days. Norman Turner, Leeds' head of insurance and investment services, said: 'At most we would be talking about a few hundred people. We will recommend they pay more, if it's necessary. The main thing is that the borrower is kept informed about what's happening.'

Mr Turner said the necessary premium increases were unlikely to be more than a few pounds a month. Homeowners who were intending to move within the next year or so could wait until they arranged the mortgage on their new home.

Nationwide sells the policies of Guardian Royal Exchange, one of the worst performing with-profits companies.

Richard Wood, GRE's director of marketing, said the number of Nationwide borrowers facing problems 'might just get into four figures'.

A Nationwide spokeswoman said the building society was still looking at what action it should take.

Apart from asking for increased premiums, other options might include extending the term of the mortgage or asking the borrower to take out an additional savings policy.

Endowment policies have traditionally been marketed as virtually certain not only to cover an outstanding mortgage loan when they mature, but also pay a handsome sum on top. With-profits policies may still be able to cover the mortgage debt even if the annual bonuses on their own are insufficient.

This is because the life insurers typically pay a 'terminal bonus' when the policy matures, but the level of this is much more volatile than an annual bonus. Building societies have therefore ignored terminal bonuses when setting the endowment they require for a given loan.

The vast majority of mortgage endowment policies are taken out for 20 years or more. Most of those now maturing are paying out very much more than the loans they were intended to cover.

Other lenders are taking a much more relaxed view of the bonus cuts than the Leeds and Nationwide. Jim Murgatroyd, of the Halifax Building Society, said there was 'absolutely no cause for concern', adding: 'Anybody with a policy over five years old will already have built in a cushion.'