Don't panic, FSA tells endowment borrowers

City regulators yesterday issued emergency advice to millions of mortgage holders worried their endowments will fail to cover home loans. The financial services authority (FSA) urged people not to cash in their endowments without taking independent advice.

The agency has been bombarded with calls from anxious homeowners in the wake of disclosures that Scotland Yard is investigating the alleged mis-selling of endowment mortgages. The FSA confirmed it was working with the fraud squad, and that it would be tightening the regulations governing endowments.

Concern also has been triggered by falling rates of interest and inflation. "This could mean that some endowment policies, particularly some 'low cost' or 'low start' endowments, might no longer be on track to pay out a big enough sum at the end to repay the mortgage in full," the FSA said.

Endowment mortgages, which involve homeowners paying into a savings vehicle that will clear the mortgage at the end of the term, still account for 30% of all home loans sold, despite their tax advantages having been removed in the mid 1980s. Critics say sales efforts have been motivated by the commission that endowment policies pay.

The fraud squad is thought to be looking at three cases in which it could be argued that the buyers of endowment mortgages were sold products unsuited to their needs.

The FSA's consumer relations director, Christine Farnish, warned endowment holders against panic selling of their policies. "Most people who have an endowment mortgage should find that it is doing the job perfectly well."

But the agency admitted that most endowment mortgages do not guarantee that the endowment will be large enough at maturity to pay the underlying home loan.

• Mortgage lending appears to have peaked. Approvals fell last month for the first time this year as loans reached a record £7bn. The British Bankers Association said that the average price of a house fell slightly, in line with seasonal trends, to £71,800 from £72,500.

"July could well have been the turning point in the banks' secured [mortgage] lending, as data for approvals in the month were noticeably lower than the peak figures in June. We would therefore expect a moderation in loan demand over the coming months," said Tim Sweeney, director-general of the BBA.

The number of approvals fell by 8% in July compared with the record levels in June and the value of the loans was 9% down.