New group face shortfall

Nearly half a million home buyers with endowment-style mortgages face shortfalls. But they are not covered by the official FSA reviews - which are themselves now at the centre of a storm.

Jobs & Money can reveal that the 500,000 in trouble are home buyers with interest only loans who bought Isas, Peps and pensions plans to produce lump sums designed to repay borrowings.

Pension mortgages are complicated and the esti mated 300,000 with these plans should have been given expert advice and treated as sophisticated investors.

But Peps and Isas were sold over the counter from the mid 1990s - often a replacement for the increasingly discredited endowments.

However, with a combination of high hidden charges and falling stock markets, many are now so far behind their targets that buyers would have done better to have kept cash under the bed.

The Halifax, Britain's biggest lender has 70,000 Isa customers. It started selling them in May 1996, stopping earlier this year "due to falling demand."

The lender says a buyer who started in May 1996 at £100 a month- considered enough to repay a £60,000 loan over 25 years - would have £7,119 for their £7,000 outlay. A January 1998 start would produce £4,677 for the £5,300 paid in while an Isa mortgage set up in January 2000 would now be worth £2,579 for the £2,900 paid.

Halifax set up the Pep/Isa scheme on more conservative growth assumptions than many rivals as it ignored the tax benefits. But the figures it gives are higher than many plans are worth - it has ignored the often large extra costs of life cover and other expenses which it built into its in-house investment plan.

So far, only a handful of Isa plans have been reviewed - some are red, some are amber, indicating they will fail to pay off the mortgage (only policies marked green are on track). The majority will only be told their fate once their plan is in force for 10 years.

Abbey National with around 20,000 Isa customers also ignores costs. In the 38 months since its set its scheme up in March 1999, a £100 a month for the £3,800 pid plan is now worth £3,551.

The Abbey says: "This is an equity investment, so there is a risk that the required return may not be achieved on the premium quoted. However given we only recommend this for terms of 15 years or more and we use a projected return of 7%, our fund managers are confident that this is a reasonable assumed projected return over the longer term. We write to customers every year advising them of their fund value."

But it will not give shortfall projections until 2004.

And figures from Nationwide show similar shortfalls even before extra costs such as insurance. It estimated £70 a month to repay a £60,000 loan over 25 years in January 1996. Someone who started then is just ahead - £5,413 for the £5,390 paid in.

But a January 2000 mortgage which needed £93 a month, as projection rates were cut, is now worth £2,355 for the £2,697 contributed - also before additional charges. It says it sends a shortfall warning once a year.

The row over endowments escalated this week when Britain's top financial watchdog hit back at criticisms that it is not doing enough to help.

The Financial Services Authority has consistently ruled out a personal pensions style inquiry into endowments.

But the criticism of this prompted FSA chairman Sir Howard Davies to take the unusual step of publishing a lengthy defence of its stance, suggesting to some observers that it has been rattled by the attacks.

And his ruling out of an inquiry should perhaps be taken with a pinch of salt. It's worth remembering that on December 11, 2000 the FSA shooed away demands for an inquiry into the Equitable Life scandal...then eight days later it bowed to pressure and announced it would be holding an investigation of sorts.

The FSA came under renewed fire on endowments after figures were issued last month indicating that 6m policies have little chance of reaching their target figures, with many set to fall far short of the amount needed to pay off the mortgage.

The Consumers' Association seized on the figures to accuse the FSA of "sitting on its hands". The CA called for a full investigation into endowments, saying that with as many as 6m homeowners on course for problems "how many more million people need to be affected before the FSA acts?"

It also said the FSA should "name and shame" endow ment providers with the worst performance and mis-selling records.

But in a letter to the CA this week, Sir Howard rejected these demands, saying an investigation along the lines of the pensions mis-selling review would result in an admin bill alone of around £5bn. "In our view this would be disproportionate," he says.

Sir Howard adds that he does not accept that naming the worst-performing companies would help people decide whether they were mis-sold their policy. "Such information could provide an exaggerated incentive to complain, with no greater prospect of that complaint being upheld."

He also raised eyebrows by arguing that many of those who received a red or amber letter "may well continue to consider that the product is suitable to their needs because they can afford to increase the premiums or because they are no longer using it to repay their mortgage".