Would they lie to you?

Millions of homebuyers face huge shortfalls on endowment mortgages. But in the mid to late eighties, when up to four out of five homebuyers opted for the mysteries of this complex life policy, they were touted as the road to riches that could not fail.

Home loan customers fell in love with endowments. Not only would the endowment pay off their mortgage in exactly 25 years to the dot, they would also receive a "tax-free lump sum" which "could be spent or invested as you wish."

The only question was the size of this lump sum. However, they never materialised. And a new report from life insurance expert Ned Cazelet reckons 90% of endowments will show a shortfall averaging £11,000.

How were so many taken in? There are no tapes of the techniques used by the fast-talking sales people. But today we can expose for the first time a crucial document from Standard Life, used to promote endowments in the late 80s. It was the biggest operator in the market, with some 1.4m endowment customers, selling 100,000 plans a year by the end of the decade. The leaflet, headed The Seven Year Itch, shows three families. Two are dubbed The Cannyman and the Wise, and they buy endowments. They end up so much richer than the Cutcosts who went for a repayment mortgage with a lower monthly outlay.

It is a document which Standard Life no longer has in its archives. It is a document it would prefer to forget. The leaflets were handed out by mortgage sellers such as giant Abbey National. The sales line was simple - homebuyers would be fools to use any other method. The clever families spent more than the Cutcosts but the tax free lump made the endowment worthwhile.

The Cannyman endowment household's pick up a cash lump sum that equals their entire mortgage outlay. And the Wise endowment family get back £33,000 more than the cost of their house buying. But Standard Life concedes that "The Seven Year Itch" - parts of which are reproduced here - showed performance figures for policies which did not exist and failed to take major tax changes into consideration.

It also agrees that many who acted on the leaflet - used between late 1985 and the Financial Services Act in 1988 - face substantial shortfalls. The main purpose of the leaflet was to push low cost endowments which did not guarantee full loan repayment or a lump sum, whatever sellers said. The Cannyman family are shown as paying off a £20,000 loan with a total endowment premium and interest payments of £45,333. But as they get a £45,000 lump sum, their loan appeared to be free. The only problem was that low cost endowments did not exist in 1960, the start for the families' homebuying.

"They were a late seventies creation," says Garry Morrison at Standard Life. "We must have created a package for the purpose of this leaflet. It was an idealised view which could not have taken costs into consideration. In retrospect, we should have made this clear."

Mr Morrison also admits the 1960 illustrations would have had costs cut thanks to life assurance premium relief, abolished for new plans in 1984.

The current situation is less rosy. The Cutcosts with a mid-1987 home purchase, will continue to pay off their loan. The Cannymans face a £10,200 shortfall on a £30,000 loan at 4% annual growth; £6,800 at 6%; and £3,000 at 8%.

The Cannymans need 10% annual growth to pay off their loan. Mr Cazalet says this will have to come from a taxed fund so underlying growth will have to be 12% to 14% over the next nine years. Standard Life says endowment customers have saved on monthly payments and are only marginally worse off".

But unless customers carefully saved this money, they will either have to fund the shortfall or extend their loan.

Case Study: Anger mounts after being told 'a load of rubbish' by Abbey

Ursula Rybicki had never heard of endowments when she decided to buy a house 16 years ago. She was fed up with renting rotten rooms - and she could see property prices moving rapidly ahead.

"I was single, working for the civil service. I had no dependents. I worked out what I could afford. I then found a home - I still live there - and went off to raise a loan," says Ursula, 45, from Manchester.

She went to an Abbey branch in Manchester in July 1987. "I needed about £22,000," she says. Abbey insisted on two appointments and advised her to buy an endowment.

"I was told this was most sensible thing - almost it was the ONLY thing to do. The adviser gave me the Standard Life leaflet which showed I would be stupid not to take out an endowment. He assumed I would be moving up the property ladder, even though I told him I would be content with a smallish property. I was still extremely uncertain.

"But the clincher was when he told me the endowment would do more than pay off the loan after 25 years. I could look forward to a substantial tax free lump sum - just like the 'smarter families' in the leaflet.

"He said it was guaranteed and implied I would be an idiot not to do this. So I was convinced. I would never have done it if I'd have known there was even the remotest chance of it failing," she says.

Ms Rybicki reported all this back to the solicitor working on her conveyancing. The lawyer offered to buy the Standard Life endowment and share the commission, so paying the legal bill. "When I went back to Abbey and said I wanted to buy the policy through my lawyer, the adviser told me I would have to do the endowment through him to get a loan.

"So I bought it from Abbey as I really wanted my house and going elsewhere would cause delay. The commission share would have given £150 but I was willing to sacrifice that to move matters along," she says.

"Now I'm really angry. I was quoted a lot of rubbish."

Ms Rybicki's most recent yearly statement shows she faces substantial shortfalls. To repay her loan she will have to finance a £7,900 shortfall at 4% annual growth; a £5,300 deficit at 6%; and will have to find £2,600 with 8% yearly increases.

These figures include a £400 boost from the Standard Life "promise". Last month she complained to Abbey of mis-selling. "I told them I had been guaranteed full repayment plus a lump sum; that I was unaware my repayment was riding on the equity market; and that, as a single person without dependants, I had no need of life cover. I also said I was told the mortgage offer depended on the endowment," she says.

Abbey National replied, telling Ms Rybicki that as the policy was sold before the Financial Services Act, it did not need to complete a fact-find.

"Abbey argues it has no evidence it offered me advice on suitability. Instead, it says it provided a comparison of the costs of various repayment methods and it was then up to me to select," she says.

Abbey's approach is similar to other providers faced with complaints about endowments sold before the Financial Services Act in August 1988. Stuart Brothers, a Newport-based solicitor specialising in financial services, believes the division between advice and information might not stand close scrutiny.

He says: "Abbey has a common law duty of care under contract law, irrespective of the Financial Services Act. The customer was seeking advice on a loan and its repayments; she received advice; she acted on it.

"So she is entitled to rely on it. Abbey should now need to show with written documentation she was given a clear message that this was not advice. The leaflet clearly shows a promise of a guaranteed amount at maturity. Abbey should reconsider," he adds.

Abbey did not respond to our questions.

How to complain and win

More endowment mortgage holders than ever are due to fall into the "red" - the red projection letter from their life company showing the policy is sure to produce a shortfall unless bonus rates soar.

As a result, banks, building societies and independent financial advisers expect a new rush of endowment complaints. But they do not want to pay up. Instead, they will scour your claim for weaknesses so they can reject it.

This week, Oxford Actuaries Consulting, which helps IFAs deal with claims, published tips on how advisers should deal with compensation requests.

· Don't rely on investment performance alone for your complaint. This does not necessarily constitute mis-selling.

· Don't give away too much with the first complaint. Try to draw the seller out to see what they hold in their files about you.

· Do gather as much information as you can before complaining. Ask the seller and the insurance company to provide copies of all the details they have on file about you.

· Don't tolerate letters from sellers that ignore some or all of the points you are making. The ombudsman will often award compensation if you are fobbed off with an insufficient explanation.

· The most common grounds for complaint are you thought it was guaranteed; you did not understand the risks; you did not want to invest in equities at all; and the policy extended beyond your expected retirement date. Try to combine more than one of these reasons or provide other grounds for complaint such as a mis-match between the policy sum and the loan, or not needing life cover at all.

· Contact the financial ombudsman help team before complaining. There is useful information on www.financial-ombudsman.org.uk including the Guide for Complaint Handlers. This is aimed at advisers, who will also be getting in touch with the help team, but has information complainants should know.