Endowment mortgage shortfall

When you took out your mortgage with an endowment policy, the aim was that the policy would grow in value. However, as the value of most policies is linked to the performance of the stock market there is usually no guarantee that the policy value will be sufficient to repay the mortgage at the end of the mortgage term.

Where the expected value of your policy is less than the mortgage amount this is known as the projected endowment mortgage shortfall.
If your complaint is upheld, it means you should never have been sold the endowment policy. So the compensation is based on what your position would now be, if you had not been sold the endowment policy – but had taken out a repayment mortgage instead. Compensation is not based on what you expected the endowment policy to be worth.

Although some customers say the firm should meet any predicted endowment mortgage shortfall – or that it should guarantee their policy will pay off the mortgage (often with a lump sum on top) – this hardly ever happens. When these policies were sold, the firm usually gave customers written information explaining there was no guarantee that the policy would grow enough to pay off the loan. So a customer’s recollection of their discussion with the firm’s representative is unlikely to be enough to require the firm to make up any predicted future shortfall.

Any endowment mortgage shortfall compensation will almost certainly take into account the current "surrender value" of your endowment policy (the amount you would get if you cashed it in) – on the basis that you should originally have been advised to take out a repayment mortgage, not an endowment mortgage. But it is up to you whether to swap to a repayment mortgage now. You must decide whether to surrender the endowment policy, or sell it to one of the specialist companies that buy them. You may wish to seek independent advice about this.

You may have grounds for an endowment mortgage shortfall complaint if your adviser did not:

tell you how your money would be invested and explain the risks involved; or

explain that an endowment policy is a long-term commitment that often gives a poor return if you cash it in early; or

check you were comfortable with the risks of your money being linked to investment performance, including the stockmarket; or

check there was a reasonable expectation you would be able to keep up payments until the end of the term; or

explain any fees and charges and how they would affect the return on your savings.

If you bought your endowment policy between 29 April 1988 and 31 December 1994, you should have been given ‘product particulars’ including charges and surrender values for the first five years. If you bought your policy on or after 1 January 1995, you should have been given a Key Features document with details of fees and charges and their effect on your savings over the longer term.

Compensation is usually worked out by looking at your position with an endowment mortgage and comparing it with what your position would be if you had a repayment mortgage. It will consider the amount of capital you would have repaid on a repayment mortgage, compared with the actual surrender value on your endowment policy (plus any difference in monthly outgoings). This is to show if you have an endowment mortgage shortfall and are now financially worse off because of bad advice.