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AT LEAST six million people face not being able to pay off their mortgage as the endowment shortfall crisis deepens.
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It is now time to take action to make up the shortfall. There is no point in pretending that things will get better. The stock market might improve, but it will need to put in an outstanding performance to shore up some policies.
In the next few months, more than ten million letters will be going out to endowment mortgage holders.
When the first warning letters went out between April 2000 and June 2001, about 46% of policies were said to be in danger of not paying off the home loans they were meant to support. But the crisis has worsened. According to the agreed 'traffic light' formula, green letters are sent to customers whose policies are on track to repay, and amber to those where there is a danger that there will be a shortfall.
Red letters are sent to customers where there is a high risk that the mortgage won't be repaid. In the latest mailing, 61% fall into the red or amber categories; but for some companies it's even worse. About 80% of Eagle Star policies register as red or amber. A green letter means that your policy needs to grow by no more than 6% a year to reach its target. However, even 6% is now looking pretty much unobtainable. The average annual bonus this year is more like 3% to 4%.
Louise Buckley, a spokeswoman for the FSA, points out that those with green letters should not rest on their laurels. 'If you don't like the uncertainty of your endowment, then even if you have a green letter, you should do something about it,' she says.
There are a number of courses of action that you can take. But whatever you do, DON'T take out another endowment to make up the shortfall. You will be throwing good money after bad, and lining a salesman's already bulging pockets.
And you may even end up paying a tax bill if you take out an add-on policy that doesn't last for at least ten years.
You could choose to make your existing policy paid up. This means that you wouldn't make any more monthly payments, but the policy would keep its original maturity date, and hopefully would grow in value.
Then, you could divert your monthly payments into a tax-efficient cash or share Isa. Or, instead, you could use the money to pay off more of your mortgage.
The danger is that your policy could be hit by penalties if you do stop paying. And, of course, you are still stuck with a potentially rotten investment. If you go for the shares route via a tax- efficient Isa, then you are dependent on the stock market and your chosen fund performing well.
With a cash Isa, your money will be safe, but you will get only a return of 4.3% at best (this is the current top cash mini-Isa, available from Cheshire Building Society).
Diverting the money to reduce your mortgage is the best idea, but make sure that your lender won't impose early redemption penalties if you are - or have recently been - on a special deal.
Make sure your lender credits any monthly overpayments against your mortgage each month: otherwise, they will stagnate on your account until the end of the year.
For many people, the best option is to change all or most of their mortgage to a repayment home loan and keep on the endowment as a savings policy. A repayment loan will cost more than the interest-only loan you are used to, because you will be repaying some of the capital each month. But you will have the certainty that your mortgage will be repaid.
You can also take advantage of some good remortgage deals - Portman Building Society is currently offering a two-year fixed rate of 4.39%.
If you decide to get rid of a with-profits endowment, the best idea is to sell the policy on the second-hand market rather than surrender it to the life company. Since the beginning of this month, insurers have had to tell you that this is an option.
However, unit-linked or unitised with-profits endowments don't usually have a second-hand market.
Craig Wetton, of the independent financial adviser Chartwell, says that if you have a policy from a reasonable company that has run the majority of its term, then keep it going. But he adds a warning for those with policies with the troubled Royal & Sun-Alliance: 'If you have a policy that has not been running long, in our view you may be better surrendering it.'
If you surrender, you could be hit by a penalty - usually known as a market value adjuster or reduction. In some cases, this could be equivalent to 20% of your money.
Remember that if you surrender or make your endowment paid up, you will need new life assurance to repay your loan if you die.
•ANN and Andrew Hall face a shortfall of up to £5,400 on their Life Association of Scotland (LAS) mortgage endowment.
The couple from Leeds, who are both 53, pay £59 a month into the 23-year endowment they took out in August 1983 to cover a £32,000 mortgage. They have been told if their money grows at 4%, they will have a £5,400 shortfall on maturity in 2006. If it grows at 6%, the shortfall will be £1,300.
Ann, who runs a catering supply company with her husband, says: 'I thought endowment companies had to put away funds in good years to even out the troughs in the bad years. People like us have got their hands tied because the Financial Services Authority can't do anything about poor investment. We are no longer relying on this to cover our mortgage. God help us if we had.'
LAS is now owned by Alba Life. A statement says: 'The Halls' policy is not due to mature for several years and so any forecasted maturity value should be considered only illustrative, with the fund value dependent on the movements in asset values over the years the policy was in force.'
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