Investors warned over cashing in endowments

Investors cold be sitting on another endowment mortgage time bomb, lenders are warning.

They are concerned because some people cashing in mortgage endowment policies early are failing to make alternative arrangements to pay off the capital on their home loans.

Homeowners may not realise the error because they continue to make interest-only repayments to lenders. But they risk being hit with huge bills for the capital at the end of their loan periods. Mortgage Express managing director Tim Dawson says: 'This could be a big problem in the future if we do not do something about it.'

There has been a jump in the number of people cashing in mortgage endowments after the adverse publicity about the product and letters going out from providers warning of potential shortfalls. Traded endowment policy dealer Policy Portfolio has seen inquiries increase by a third for these reasons. In this year alone it expects some £1.2 billion worth of endowments to be cashed through the second-hand market or through surrender to the provider.

Council of Mortgage Lenders spokeswoman Michelle Vosper says: 'If you have not taken advice and have cashed in your endowment of your own accord, you might not be aware that certain repayment elements are missing.'

There are up to three components to a mortgage, often provided by different companies: interest, capital and life assurance.

Under the mortgage code - a set of guidelines for the industry - lenders have to write to customers each year reminding them of the need to have an adequate repayment method in place. The Council is working on standard wording for these letters so that they are crystal clear.

Other than this annual statement, the lender has no responsibility to inform you of whether the capital on your loan is being paid off. New Barnet-based Mortgage Express has written to its customers likely to be affected - about 15 per cent - but generally lenders leave it is up to you to ensure there is a vehicle in place.

David Cresswell, of the Financial Ombudsman Service, says: 'This problem shows how complicated an endowment mortgage is, so remember to think carefully if you do cash in an endowment. And if you do, think of the cheque as mortgage money, not as a windfall.'

Lenders' annual statements start going out at the end of the year. Mortgage Express advises people looking for a capital repayment vehicle to seek independent financial advice.