Borrowers urged to avoid top-up trap

Don't put more money into your endowment, even if it is unlikely to repay your mortgage. That was the stark warning to homeowners this week from the industry's own professional body, the Institute of Actuaries.

A report from the institute - which also condemned the sale of endowments which run for less than 10-15 years as unsuitable for the vast majority of people - highlighted the fact that high charges make topping up an endowment bad value.

More than 500,000 people are expected to receive letters in the next few months from their insurers, asking for more cash to ensure that their endowments stay on track to repay their mortgage. Some could be asked for an extra ?50 per month or more, such as Dr Ben Wright, who has been asked by Eagle Star to increase his payments by ?61 per month.

The institute said that topping up only makes sense if the 'reduction in yield' (RIY) on a policy - which calculates the effect of all charges - is 1.3% or below. But its report found that the average RIY on 25-year endowments is 1.4%, and in some cases is as high as 2.5%. Nearly three-quarters of the endowment plans currently on the market fail the 1.3% test.

John Jenkins, the actuary who produced the report for the institute, recommends that homeowners instead earmark savings to cover any potential shortfall, or start a savings vehicle such as an Isa.

Unfortunately, many endowment victims are unlikely to receive detailed information from their provider about their choices. As Jobs & Money revealed last week, some companies are doing little more than sending out forms asking homeowners to increase their direct debit.

But Mr Jenkins says: 'It's wrong just to leave the customer hanging there. They can't do the calculations themselves, and shouldn't be told just to see an adviser. It should be the duty of the insurance company to work out their options for them.'

Dr Ben Wright, 32, a psychiatrist from Stockwell, South London, took out a ?70,000 mortgage backed by an endowment with Eagle Star in 1991. Premiums were ?75 per month but in October he was shocked to receive a letter telling him that his premiums should rise by ?61. 'It's ridiculous to increase the payment so much, there's no way I'm going to do it. I'm going to shift to a repayment mortgage instead,' he said.

The financial services authority this week warned the public not to make hasty decisions. Borrowers can call 0800-917-3311 for advice, or go to www.fsa.gov.uk/pdf/consumers/endow_fctsht.pdf.