Massive failure on endowments

INSURANCE companies say that up to 80% of homebuyers with endowments may be unable to pay off their mortgages. Millions more people are being sent letters warning them of likely shortfalls.

Leading firms, including Norwich Union, Standard Life, Prudential and Eagle Star, have sent a second round of letters coded green for 'on track', amber for 'in danger' and red for 'facing shortfall', they admitted. The first issue of such letters was in 2000/01.

Recent research by the Association of British Insurers suggests about 6.2m policies are in trouble. Endowment policies are supposed to settle outstanding mortgages and provide a tax-free lump sum, but plunging stock markets values mean many will not achieve even the first objective.

Consumer groups say people who receive warning letters should seek urgent independent financial advice.

Eagle Star is sending red or amber letters to 80% of its 150,000 endowment policyholders. In 2000/ 01, 58% received similar warnings. Allied Dunbar expects to send red or amber letters to 79% of 190,000 policyholders, up from 76%. The number of red letters has risen to 51%.

Norwich Union has recently started sending letters to 1.3m customers, including those insured with General Accident and Commercial Union. It estimated that about 80% will be red or amber, compared with 64% last time around.

Two years ago Norwich Union promised to make up any mortgage shortfalls, but that now looks unlikely. The company's investment record has been so poor that the money allocated will not be sufficient. Hundreds of thousands of Norwich Union customers now face a shortfall on their policies.

Standard Life, which has 1.5m policies, is also sending out a second round of letters. Other insurers, including Axa and Friends Provident, admit similar problems. Prudential said 56% of its 230,000 policies are either red or amber.

There are 10.2m endowment-backed mortgages in operation, covering around 7.5m properties. The Association of British Insurers believes that about 60% of these will be either red or amber. In 2000/01, the organisation's figures showed 15% of letters were red. This is now up to 35%.

The Consumers' Association believes the industry could do more to protect customers. A spokesman said: ' Policyholders need to consider whether they were misled when they bought their endowment. If so, they may have a case for mis-selling. Millions of people are suffering and companies and the Financial Standards Authority should help.'

Endowment mortgages were sold on optimistic promises, based on a booming stock market. In 1988, they comprised 84% of all home loans.

Monthly payments are are split between paying interest and buying investments. But falling share prices mean millions of homebuyers have had retirement plans shattered and could even be forced to sell their homes.

Many companies have abandoned these policies, which now account for fewer than 10% of new home loans. Rules which came into effect on Monday oblige firms to tell customers they have the option of selling their policies.