11/03/2004
A powerful all-party group of MPs, the Treasury Select Committee, today released a damning report on the widespread mis-selling of mortgage endowments. (These MPs are really getting their teeth into financial services companies; they savaged credit and store card issuers last December!)
MPs revealed that four out of five endowments (80%) will mature with values short of what is needed to pay off the associated mortgages. The average shortfall for failing policies is predicted to be around £5,500 each. What's more, MPs reckon that a staggering three out of five policies (60%) have been mis-sold.
With an estimated 8½ million policies in force, homeowners are going to have to find an extra £37 billion to pay off their home loans. Indeed, about 4½ million homeowners are relying on endowment policies to clear their entire mortgage debt. (The scale of the problem could be much worse: some estimates suggest that there may be as many as eleven million policies currently in force.)
MPs were particularly concerned about people on low incomes and those with very large shortfalls, whom they describe as being in an "advice vacuum". Some may be forced to sell their homes, or continue working well past their normal retirement date. Hence, the Treasury Select Committee has called for better financial advice for policyholders with shortfalls, plus it wants to extend the current time limits for mis-selling complaints.
Essentially, there are two main reasons why endowments are failing to live up to their billing. The first is their amazingly high charges, which have decreased their returns. Endowments paid very high upfront commission to salespeople, which meant that investors would not receive positive investment returns for the first few years of their policy.
The second reason why the performance of endowments has been lousy in recent years is the collapse of the stock market between 2000 and 2003. After peaking at 6,930 at the end of 1999, the blue-chip FTSE 100 index (which measures the value of the UK's one hundred largest listed companies) fell by over 50% in the next three and a bit years. Given that the funds that endowment premiums go into were largely invested in shares, their performance has suffered in this bear market.
Endowments were hugely popular from the late Seventies to the early Nineties, with sales peaking in 1988, right at the climax of the previous housing bubble. At that time, around five out of six mortgages (83%) came with an endowment attached!
Given that most endowments have a term of 25 years, endowment heartbreak should reach its peak in about nine years' time, in 2013. These days, borrowers steer well clear of endowments: only around 1 in 20 new mortgages (5%) have one sold alongside them, so this problem will have largely gone away by about 2025 or so!
Despite this looming catastrophe, only around 1 in 16 policyholders (6%) has made a formal mis-selling complaint and received compensation, which has totalled £670 million to date.
Complete article here: The Motley Fool.
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