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Last Updated: Wednesday, 21 September 2005, 11:53 GMT 12:53 UK
Q&A: Endowment mortgage shortfall
Alarm clock
There is a time limit for endowment complaints

Millions of endowment policies still in force are in danger of falling short of the sum required to pay off the policyholder's mortgage.

Insurers are required to write to endowment policyholders every two years and inform them whether their investment is on track to meet the target sum.

BBC News explains what should you do if you are told that your endowment may not measure up?

How big a problem is endowment shortfall?

In 2003 the government estimated that about eight in 10 of the endowment policies then in force were unlikely to pay off the mortgages they were taken out for.

Since then, nearly 70% of those facing a shortfall have remortgaged, sought financial advice or applied for compensation.

However, the Financial Services Authority (FSA) said that about 700,000 people had still done nothing about their endowment shortfall.

Some of these people may find that it will soon be too late to complain.

The general rule is that people must complain within three years of receiving their first "red letter" - outlining a likely shortfall - from their insurance company or lender.

Under industry rules insurers are allowed to ignore complaints made after the time bar comes into play.

What will my endowment statement letter tell me?

The letter tells you whether your endowment is on track to re-pay your mortgage, or whether it is heading for a shortfall. The letters are colour-coded according to the level of potential shortfall.

Those who receive green letters are currently on track to re-pay their mortgage. However, the value of their endowments must continue to increase by at least 6% a year, otherwise they may fall into arrears.

If you receive an amber letter, there is significant risk that your endowment will not pay off your mortgage.

If you receive a red letter, there is a high risk of you being unable to repay your mortgage at the end of the endowment's term.

Experts warn people not to panic, even if they have received a red letter.

Help! My endowment is heading for shortfall - what should I do?

The Financial Services Authority (FSA) has banned insurers from giving advice in the shortfall letters.

You should get an advice booklet from the FSA, called: "Your endowment mortgage - time to decide" when you receive the letter.

If you have not received one of these, you can get a copy from the FSA website, under 'Consumer Help.'

Alternatively, you can obtain one by calling the FSA on 0845 456 1555.

The FSA also has an endowment information sheet, which explains how the investments work.

Should I top up my endowment?

Most experts warn people to steer clear of either increasing their payments on an existing endowment or buying a new one.

David Hollingworth of London & Country, a mortgage broker, says this is simply "throwing good money after bad".

How should I go about paying off any shortfall?

If you are prepared to take the risk of investing in the stock market, there is the option of taking out an additional investment, such as a unit or investment trust, within an Individual Savings Account (ISA) to cover any shortfall.

Interest-only: Pay only mortgage interest each month - must rely on an investment to pay off mortgage debt at the end of term
Repayment: Pay off both interest and mortgage debt each month, so no shortfall at the end of the term

But the safest route, according to Mr Hollingworth, is to change your mortgage into a part-repayment loan.

This means that in addition to paying off the mortgage interest each month, you make extra payments to start paying off the underlying mortgage debt.

This reduces the size of the mortgage, and thus should reduce any shortfall caused by the endowment underperforming.

What about mis-selling?

A Treasury Select Committee report suggests as much as 60% of endowment policies may have been mis-sold.

It added that the time limits within which complaints must be lodged had been poorly communicated and required an urgent review.

But just because your endowment isn't performing well does not mean that you have a case for mis-selling.

If you think you do have a case, you should act on any shortfall before you file a claim for compensation.

What are the grounds for compensation?

The first step is to complain to the company who sold you the endowment.

If the company can not resolve your complaint or has turned you down for compensation, you must approach the Financial Ombudsman.

In June 2005, the Financial Ombudsman Service (FOS) revealed it was receiving 1,300 endowment mis-selling claims a week.

Of cases examined by the FOS, about 40% have been ruled in the claimant's favour - and they have received compensation.

Basically, you should have grounds to complain if:

  • The product was unsuitable at the time it was sold.

  • You did not understand what you were buying or the risks involved at the time you bought the policy

  • The sale was inappropriate given your financial and personal circumstances at the time, for example, if you were told that your endowment would pay off your mortgage when you retired.

For any claim to be successful, the Ombudsman must determine that you have lost out as a result.

It will calculate compensation based on comparing the performance of your endowment with a repayment mortgage over the same period.

Making a complaint?

If you believe that were mis-sold an endowment, you should follow these steps:

  • Contact the firm who sold you the endowment

  • If you are dissatisfied with the way the complaint has been handled, or the company has turned down your request for compensation, you should then contact the Financial Ombudsman Service at the address below:

The Financial Ombudsman Service (FOS) South Quay Plaza, 183 Marsh Wall, London E14 9SR Tel: 0845 080 1800

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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