Home loan sharks grab £150m a year

AT LEAST £150m a year of homebuyers' money is being handed out in commission payments on endowment policies. The bonanza was uncovered following the industry admission that six million endowments will fail to pay off mortgages - leaving individual shortfalls of thousands of pounds.

Salesmen or the building societies and banks that employ them receive a regular monthly commission payment on endowments even though they may have had no contact with the homebuyer since the sale.

Householders who were sold 25-year endowments as long ago as 1977 are receiving warning letters to say their payments will not even cover their mortgage - let alone give them the nest egg they expected at the outset. Nonetheless, part of every monthly premium is still deducted to pay commission to a salesman.

A leading insurance industry analyst has made a 'very conservative estimate' that banks, building societies and financial advisers are pocketing at least £125m to £150m a year using the device, known as renewal commission.

Ned Cazalet, of Cazelet Financial Consulting, who calculated the figures for the Daily Mail, said: 'A lot of this money is going into the pockets of the lenders because they were the ones who sold the endowments.'

The huge commissions paid on endowments in the 1980s and 1990s led banks, building societies and financial advisers to push them to customers. At one stage four out of every five new mortgages were tied to an endowment and the biggest mortgage banks and building societies made at least a quarter of their profits from selling them. Lenders often made their cheapest mortgage rates available only to people who bought endowments. These tied deals were removed only after a Money Mail campaign highlighted the dangers.

Monthly endowment payments, lower than repayment mortgages, were split between paying the interest on the home loan and buying investments. But stock market falls have created a black hole estimated at £60bn.

According to research by the Association of British Insurers, released this week, holders of more than six million endowment policies are now facing an average shortfall of £10,000 below even the original home loan. Some could have to sell their homes.

Industry sources say a £60,000 mortgage in 1990 would have typically required the borrower to save at least £100 a month into an endowment. Selling the policy would have triggered an initial payment of more than £1,000 to the bank or financial salesman. But they would then receive a monthly renewal commission of about £2.50 for the life of the policy.

A salesman who sold two policies a week could have made £100,000 in the first year from initial commission plus £3,120 a year from renewal commission for the next 25 years. A salesmen who worked for ten years through the height of the endowment boom from 1985 to 1994 could now be receiving more than £31,000 a year in renewal commission for doing nothing. A borrower with a £60,000 mortgage could pay at least £2,000 in initial and renewal commission. Properly invested this money would cover the shortfalls on most endowments, say experts.

The Consumers' Association claims that initial commission paid to financial advisers on endowments is directly responsible for the huge shortfalls many borrowers are experiencing today. Spokesman Mick McAteer said: 'These policies were sold in the run up to one of the longest sustained bull markets on record. So even with the recent downturn you would expect people to be sitting on substantial surpluses rather than shortfalls. But the problem was that the products were sold with huge upfront commissions which meant much of your premiums weren't going into the stock market. So the companies and sales people coined it in when times were good and now that times have turned bad they want consumers to pay up.'

The Consumers' Association has demanded that the Financial Services Authority conduct a full scale mis- selling review into endowments along the lines of the one carried out on pensions.

Policyholders usually have no control over commission payments because most insurance companies will not cancel them. Of the biggest companies only Standard Life said it would cancel the payments if a policyholder requested it and feed them back into the company 'to benefit all policyholders'. Others said the payments were part of salesmen's remuneration, so they would not cancel them. No insurer would return the commission directly to the policyholder.

Mortgage meltdown