How to fill the endowment gap

University lecturer Colin Richardson is among thousands of people facing up to the possibility that their endowment policy will not repay the mortgage. He is bitter, and feels that the salesman who sold him the Legal & General policy, taken out 10 years ago to repay a £42,000 loan on the Richardson family home in Durham, misled him about how it would perform.

'It was put forward as inconceivable that it wouldn't pay off the loan,' says Colin. He had asked clearly whether the policy would repay the loan. The salesman's reaction was 'almost a smile on the face'.

Yet 10 years later a letter from the company has warned Colin there may be a shortfall of almost £7,000 on his policy when the loan is due to be repaid in 15 years' time. He believes the policy was mis-sold to him, and is trying to find the best way to bridge the gap.

Here is a guide to dealing with endowment problems:

Do I have a case for compensation?

The Financial Services Ombudsman is receiving a record number of complaints about endowments, and they are unlikely to diminish this year as homeowners are warned of shortfalls. Fresh publicity about endowments resulting from last week's BBC Panorama programme is also likely to increase awareness among homeowners.

A shortfall will not necessarily produce compensation payments. Policies are now projecting gaps because companies are forecasting lower rates of investment growth in future than when the policies were set up. The Financial Services Authority warns, however, that it's no use complaining if you are 'simply unhappy about how your endowment has performed'.

Many people feel they were not adequately warned about potential shortfalls, however. A spokeswoman for the Ombudsman's Office says: 'If they say they weren't warned [that the loan may not be repaid], it would be up to the adviser to demonstrate that the person had received warnings.'

It would be useful to have written evidence of inappropriate reassurances, she adds.

In Colin's case, Legal & General insists that no guarantees will have been given, though he recalls being told that 'not only would it pay off the mortgage but almost certainly there would be money left over'. He was told there would be free life insurance with the endowment mortgage whereas, with a repayment loan, he would have to buy life cover separately.

None of this was written down. But for people in his position it may still be worth making a formal complaint to the seller of the endowment. In most cases this will have been the mortgage lender, acting as an agent of the insurer. Only if you are not satisfied with the insurer's response can you take your case to the Ombudsman.

One category of complaint that is going the policyholders' way is where cover was sold to someone who would pass retirement age when it was due to mature (see below).

What's the best way to pay off a shortfall?

The main options are to:

• Convert a sum equivalent to the forecast shortfall into a repayment loan. Make sure your lender understands what you want to do. Colin asked his lender, Cheltenham & Gloucester, how much it would cost per month to repay his £7,000 shortfall over 15 years. He was quoted around £100, about four times the amount Legal & General said it would charge to top up the endowment with an extra policy. When Cash contacted C&G it said the repayments would be just over £59; staff must have assumed he wanted to convert the entire loan.

• If you will be stretched to afford extra monthly payments involved, find out whether remortgaging could produce savings.

• Save in a tax-free Individual Savings Account. Your choice of Isa will depend on how much time you have until the end of your mortgage. If it is less than five years, it would be too risky to use a shares-based Isa. Phillip Cartwright of mortgage adviser London & Country says homeowners should be aware, however, that if they choose an equity Isa there will, again, be no guarantees that the investment will repay the shortfall. For some homeowners, the minimum monthly payments quoted by the insurer to top up the endowment will be lower than the minimum sums needed to start an Isa. But returning to the insurer may still be 'throwing good money after bad,' says Cartwright.

• Have you other investments that may mature in time to repay the shortfall? If you have spare savings available now, it may be worth paying a lump sum off the loan.

• Consider extending the term of the mortgage and endowment to give the policy longer to repay the loan.

• The least attractive option is to pay more money to the endowment insurer.

Payouts for Observer readers

Compensation for endowment mis-selling is being paid to readers who appealed to the Financial Services Ombudsman on the advice of Cash.

Madeleine Brierley, 53, a teacher from Lancashire, was delighted when the Ombudsman found in her favour after she complained about her CIS endowment: 'When I took out the mortgage I was 43, and it took me well beyond my retirement age, to 71.' She is to receive £14,500, for premiums paid plus interest.

• Financial Services Authority: 0845 606 1234 Ombudsman: 0207 216 0016