State of play with mortgage endowments today

The Budget of April 1988 saw then chancellor Nigel Lawson announce that unmarried house buyers could no longer claim two sets of tax relief on mortgage interest up to £30,000 each, under the mortgage interest relief at source (Miras) rules.

This led to a rush to complete mortgages and secure mortgage endowments between April and August 1988 when the change was implemented.

What is interesting is this spike in maturities last year did not lead to a spike in complaints. This is because by this point if red letters had been received, complaints should already have been dealt with.

Another reason could be despite the doom and gloom at the turn of the millennium about these products failing to meet expectations as early as 2006, sister publication Money Management’s research revealed some long-term mortgage endowment policyholders who claimed for mis-selling were actually making gains from their policies.

Providers back in 2006 were invited by Money Management to give the premium, maturity value and annual growth rates for their low-cost endowment products. Some 21 providers were willing to share the information.

The results showed those with 10-year, 15-year and, to a lesser extent, 20-year endowments still faced large shortfalls on the policies. But those with 25-year endowment mortgages at that point actually stood to benefit from healthy surpluses.

The surpluses were revealed by Money Management when 25-year endowment mortgages were compared with repayment mortgages.

When contemplating what the future holds for this product, what is clear is mortgage endowments are rarely sold nowadays.

If mortgage endowments are sold, Paul Turnbull, actuarial and capital director of Aviva, says providers supply a customer friendly guide to help to explain the risks involved.

Following on from the arguments in the courts between Legal & General and the then regulator about consumer understanding of these products, most providers now undertake rigorous customer testing to ensure all risks and features - including with-profits bonuses and smoothing - are clear, fair and easily understood, Mr Turnbull adds.

Mr Turnbull says: “The well-publicised problems with endowments taken out in the 1980s and 1990s are often regarded as being a with-profits problem, because most endowments invested in this type of fund.

“In fact the same problems would exist, and could possibly have been even worse, if the investment had been in a unit-linked fund, or other type of stock market investment.

“When monthly premiums for endowments were calculated, they assumed high rates of return and high levels of inflation, which the country was used to experiencing. However, as inflation fell, investment returns also fell.

“As a result, the actual rates of return and inflation experienced have been far below the rates assumed when the endowment was taken out and the premium was calculated.”