Homeowners warned on shortfalls

Homeowners facing shortfalls on their endowment mortgages are being urged to take action today, following an investigation by the Financial Services Authority (FSA) which shows that seven out of 10 people have failed to act on letters from their mortgage lenders.

Nationally, about 10.5m letters have been sent out by endowment providers to an estimated quarter of all households. The letters, which were sent out to mortgage endowment customers between January last year and June this year, were graded into three colours: red, amber and green. The colours indicate how big a shortfall is faced, with red representing the highest risk.

At the end of May this year, 99% of letters had been issued and 54% of those were green, meaning the endowment was likely to meet its target and pay off the loan. Just over 30% were amber, meaning investment growth needs to be above the projected 6%, but not more than 8% to meet its target. Just over 14% were red. Red letter holders face a likely shortfall with investment growth needed at more than 8% to pay off the loan.

Endowment-linked mortgages were the most popular type of home loan in the late 80s and early 90s, but growth projections given at that time were overly optimistic, as market conditions have since changed.

Since the Financial Services Act was put in place a decade ago, salesman have been prohibited from basing their forecasts about investment returns on past performance. Nevertheless, over the years, many homeowners have been left with the optimistic impression that their policies would produce more money than they needed to repay their loans.

According to the latest FSA findings, 60% of homeowners say they were told the policy was guaranteed or would definitely pay off the mortgage with fewer than 10% saying they were told there was a risk it might not pay off the mortgage.

According to the FSA findings, although only 30% of endowment mortgage customers have taken action, over half of those who haven't taken action gave sensible reasons for not doing so. The main reason given was that the policy is on track to repay or that the expected shortfall is very small. A smaller percentage of people said they would make up any shortfall with other savings.

However, the FSA is warning that some of these people should take action. For example, it says there may be some people who have been told their policy is on track but who are not comfortable with the risk that future reprojection letters could show a better or worse position.

Of those who have failed to take action and not given a sensible reason why, 10% of them simply haven't got round to doing anything yet, while a further 10% don't know why they haven't done anything.

"Making sure you repay your mortgage loan is one of the most basic financial needs. If there's a risk that you won't be able to, and you're not comfortable with that, then now is the time to decide what to do," warns Christine Farnish, director of consumer relations at the FSA. "If you need to put more money aside to pay off your mortgage, it's a lot less painful to do it sooner rather than later."

The FSA has issued new guidelines to people with an endowment mortgage in a factsheet entitled Your Endowment Mortgage - Time to Decide. It is available by calling the FSA consumer helpline on 0845 606 1234 or by visiting itswebsite.