During the late 1980s, life assurance salesmen trumpeted the value of the endowment as a mortgage repayment vehicle. While there are many credible reasons why endowment mortgages were best for the client, it is a fact they also generated significant commissions. The sale of endowments continued apace throughout the 90s and the proliferation of mortgage advisers in the UK ‘ 35,000 at last count ‘ is a reflection of the high earnings to be had from selling endowments and pensions alongside mortgages.
For various reasons, there has been a massive shift in the popularity of repayment methods. I believe the demise of the endowment is due principally to consumer lobby groups and much less about the appropriateness of the contract for mortgage repayment. Unfortunately, for mortgage advisers relying on the income, the whole concept of invest to repay seems to have been undermined for good.
Paul Flynn, a Labour MP for Newport West, tabled an Early Day Motion: Endowment Mortgages Mis-selling, this year. Flynn’s concerns were that the FSA’s research proves that five million endowment policies may not be sufficient to repay their mortgages; that only 10,500 people have been compensated out of three million who were mis-sold endowments ‘guaranteed’ by sales people to repay mortgages; and called on the Government to instruct the FSA to launch a mis-selling inquiry.
Adding weight to Flynn’s tirade, the Consumers’ Association called for a public inquiry into the with-profits industry. It stated 10 million pension and endowment policyholders were being ‘short changed’ and fewer than one in three endowment policyholders keep up payments for the full 25 years.
What hope had the mortgage advisory market got? Industry responses were not convincing. Mary Francis, director general of the ABI, said the controversial with-profits policies were good value. She said: ‘Over the last decade they earned on average 11% a year after tax.’ But it was perhaps too late.
While 78% of new borrowers took endowment or pension mortgages in the early 1990s, this invest to repay category has virtually collapsed.
My serious regret is that a generation of borrowers are seriously financially exposed, due to lack of insurance. Despite perceived faults, the endowment contract ensured the majority of borrowers had appropriate life assurance, but now, thousands of consumers decline basic life insurance, entering the mortgage contract without any cover. Borrowers are no longer compelled by lenders to buy the cover, so most do not do so.