If you have an endowment mortgage, it was likely arranged so that you could enjoy the benefits of an interest-only mortgage (lower monthly repayments). Plus, protected by the security of an endowment insurance policy designed to cover the capital repayment costs at the end of your mortgage term.

As some people have found to their cost, the risk in any such endowment mortgage is the performance of the endowment policy and whether the eventual payout covers the capital repayment on the mortgage. If it does not, you have a potential endowment shortfall.

From time to time, the endowment shortfall arises not simply because of underperformance but mismanagement by the insurance company – as a story in the Daily Record on the 12th of January 2020 went to show.

How do endowment mortgages work?

Endowment mortgages were widely popular throughout the 1980s and ‘90s. They promised the benefits of a relatively cheap interest-only mortgage backed-up by an endowment policy (a monthly insurance savings plan). This savings plan would, on its maturity, payout enough to cover the capital repayment of the mortgage and still leave a handsome remainder for the policyholder to enjoy in his or her retirement.

However, as a story in the financial pages of the Daily Mail published way back in November 2017 explained, a good deal of the marketing fell little short of an endowment mortgage scam. Policyholders were often promised overinflated results from their endowment savings policies. Where policies were promised to pay out as much as £110,000, for example – enough to repay the mortgage three times over – the actual payout amounted to just £24,000.

The Daily Mail predicted that “hundreds of thousands” of homeowners would face endowment shortfalls so severe that they would be forced to sell their homes.

How do I know if I was mis-sold an endowment mortgage?

If you have this type of old endowment mortgage, how do you know if it was mis-sold to you?

The Money Advice Service explains that you may complain to the Financial Ombudsman Service if you believe that advice you were given on the purchase of your endowment mortgage was inaccurate or misleading (but not simply because you feel the product was unsuitable given your needs and circumstances).

Valid grounds for complaint, therefore, might include:

  • a failure on the part of the salesman to explain that you might face an endowment shortfall;
  • you were promised that the endowment would definitely pay off your mortgage;
  • you received no explanation about the various fees and charges; no assessment was made of your financial circumstances;
  • even though the policy would run beyond your retirement, no attempt was made to check that you would be able to afford the premiums;
  • or the salesman encouraged you to cash in an existing endowment policy before selling you another.

The Financial Services Compensation Scheme (FSCS) adds a further reason to complain – and to seek compensation – if no one pointed out to you that the endowment policy you were buying matured after the interest-only mortgage term had already been reached.

The FSCS warns that there are time limits to receiving compensation for any financial losses you incurred because your endowment policy was mis-sold. The limit is six years after the date on which you were sold the policy or if it gives you longer to complain, three years from the date you realised you had cause to complain.

What should I do if I have an endowment shortfall?

During the course of your endowment policy, you should be receiving annual projection letters which let you know whether your endowment is performing sufficiently well to pay off your mortgage debt or whether you might suffer an endowment shortfall.

If you are given notice of a potential shortfall, you might want to act sooner or later – especially, given the time deadlines, if you are also going to be making a complaint to the Financial Ombudsman Service.

Possible actions include:

  • remortgaging by converting your current interest-only mortgage into a standard repayment mortgage. Although that will mean higher monthly mortgage repayments, your mortgage debt will have been repaid by the end of the mortgage term;
  • as an alternative to converting the whole endowment mortgage, convert just a part of it – although they will increase, your monthly repayments will be less expensive than converting the whole mortgage, and you may repay the outstanding capital on the interest-only mortgage once the poorly-performing endowment policy pays out;
  • draw on your savings or other investments to pay off the capital balance on your current interest-only mortgage;
  • cash in your endowment policy ahead of its maturity and use it to pay off part of the outstanding capital on your mortgage – although this will only delay your need to find additional capital to pay off the remaining balance; or
  • seek out an alternative investment vehicle more likely to generate the funds you will need to repay your current mortgage once it reaches full term.

On these – as with many other mortgage issues – you might want to seek the expert, professional advice of your mortgage broker.