Mortgage endowment payouts cut again: more falls to come

There was more bad news this week for thousands of people with mortgage endowments, after Norwich Union cut payouts again - and warned that things aren't about to get better any time soon.

The insurance giant says a typical maturing £50-a-month, 25-year General Accident endowment being used to pay off a mortgage will from this month pay out £50,295. That compares with the £59,444 that an equivalent policy was delivering just two years ago. And it says payouts on this type of policy "are likely to continue to reduce".

However, some policyholders will be left scratching their heads as to why the prognosis is so gloomy when the company's main with-profits funds notched up an impressive investment return of 17.7% before tax last year. Norwich Union's explanation is that "our expectation of future investment returns has reduced compared to those historically earned".

The company has 2.8 million customers holding with-profits policies, including 900,000 mortgage endowment policyholders, 1.1 million pension plan holders and 600,000 people with investment bonds.

About 46,000 of its mortgage endowments are due to mature this year, of which 24,000 are expected to fall short of their target. However, some of these customers will receive a helping hand in the form of a payment from the company's "mortgage endowment promise" scheme, which will reduce the shortfall.

Some 72% of the group's mortgage endowments are in the "red" danger zone, where there is officially a high risk that they will not pay off the home loan. A further 21% are in the amber zone, which means there is a significant risk of a shortfall. Just 7% are "green" (on track to reach their target). The company is about to start writing once again to its mortgage endowment customers to give them the latest on how their policies are performing. It has redesigned its "red" letters to make it even more clear to people that they have a shortfall and must take action.

While there seems to be no end to the gloom on endowments, the prospects are much brighter for many holders of shorter-term policies. They will benefit from bigger payouts this year. Norwich Union also announced it is again reducing its "market value reduction," the exit penalties that affect people who cash in their policies early or move their money to other insurers.