When your endowment mortgage falls short

PERSONAL FINANCE:IT WAS ALL ABOUT trackers at the height of our recent ruinous boom – and many banks are still counting the cost – but back in the early 1990s, when the property market was relatively stable, endowment mortgages were the only game in town, but they have left consumers and not banks counting the cost. While trackers were simple (despite what the man on the bus used to say), transparent and – crucially – cheap, endowment mortgages were opaque and expensive and, as we now know often left homeowners without the cash to pay off their debts.

Eddie Hobbs, who made his name highlighting the endowment risks in the mid-1990s recently described them as having “all the transparency of cast concrete”.

The good news is that many of those facing shortfalls on their mortgages may find themselves eligible for compensation following a landmark court ruling which is paving the way for a class action-type law suit.

Endowment mortgages were marketed heavily in the early 1990s and homeowners who plumped for them were promised the chance to pay off their debt while at the same time offering them the possibility of making a little nest egg for themselves.

Unsurprisingly, the marketing pitch paid off, and between 1989 and 1992 such mortgages accounted for over one-third of total mortgages approved in Ireland. And why such a push from the lending institutions? Well, they often came with lucrative commission structures for a start. “At one stage, there were endowment mortgage products paying 95 per cent of the first year’s premium to the salesperson,” says financial advisor Liam Ferguson.

In addition to the hard push from lending institutions, tax relief was also available on such products, increasing their attractiveness. But what are they? Unlike annuity mortgages, whereby you repay a combination of interest and principal to the lender each month, those with endowments only repay interest during the term of the mortgage.

Instead of paying down the principal, this portion of the mortgage payment goes into an insurance policy each month, with the aim of paying off the entire mortgage after a certain period of time, usually between 15-20 years. So, depending on the performance of the policy, the homeowner could walk away mortgage free and with some extra money for themselves once the term of the mortgage ends and they cash in the endowment policy. However, just as easily, the policy might not have performed adequately to repay the mortgage, leaving homeowners high and dry. Many of the policies are now coming to maturity, leaving homeowners facing significant shortfalls on their mortgages.

Although the Financial Regulator does not publish data on endowment mortgages, the numbers outstanding are believed to be relatively small. According to Bank of Ireland, for example, endowment mortgages now account for a “minuscule” proportion of its overall mortgage book.

“My sense of it would be that a lot people became aware some years ago that their endowment policy wouldn’t do what they expected it do, so they switched to other arrangements. There wouldn’t be too many left with original terms, given the bad publicity surrounding the products, so when people traded up they switched on to an annuity mortgage,” notes Ferguson.

Nonetheless, for those still stuck with such a policy, a recent landmark decision at the Circuit Court may mean that those who feel they were mis-sold endowment mortgages now have a chance for recompense.

Last month, two pensioners sued Bank of Ireland for negligent misrepresentation of an endowment mortgage, and were awarded €16,000 in damages. The couple claimed that they had lost €22,000 over the life of a €50,000 15-year mortgage, and that the bank had been negligent in its advice, and had not infomred the couple of the risks associated with endowment mortgages.

Given that the Financial Ombudsman has been unable to deal with many of the complaints relating to endowment mortgages, this outcome provides another outlet for compensation. Although, since 2005, the office of the Financial Ombudsman has dealt with over 500 cases related to endowment mortgages, and so far in 2010 there have been 40, it is nonetheless precluded from investigating complaints where the conduct complained of occurred over six years before the complaint is made – and given that most endowment policies were sold some 20 years ago, this excludes many such policies.

Instead, the Ombudsman investigates the administration of endowment policies within the six-year timeframe, looking at policy statements and maturity projections received, for example.

Indeed this statute of limitations also almost prevented the aforementioned court case from going ahead, but now, given that the test case went so well, lawyers involved in the case are gathering hundreds of similar complaints. Next time however, they will be hoping for a resolution through mediation, rather than through the courts again.

Although the mis-selling of endowment mortgages first came to light back in the 1990s, the cases are coming to court now because such policies have been maturing, as well as due to delays associated with the legal process. Given that the limit for compensation in the Circuit Court is €38,000, most of the complainants are understood to be looking for compensation of between €10,000-€15,000.

However, just because you may have made a loss on your endowment policy, it doesn’t mean that you will be eligible for compensation through the courts.

“It will hinge on how it was sold in the first place,” says Ferguson. “If it can be documented that the risks as well as potential rewards were explained clearly to you, then you don’t have a case”.

Indeed the court cases which are in the pipeline share the common characteristics of showing a fairly well documented representation that the homeowner was informed that a) the mortgage would be repaid; and b) that there would be a strong chance of a surplus left over at the end of the term.

So what do you do if you are stuck with a short-fall with no possibility of a successful compensation claim against your lender?

Well, you have a number of options. If you want to cash in your policy, and pursue other means of meeting the shortfall, you could try and sell your policy either back to the life company, or to an endowment trader, who may be able to offer you a better price. The Endowment Policy Purchasing Company (TEPPCo), a part of the IFG Group, for example, gives a free valuation on policies from life assurers such as Irish Life, Acorn Life and Eagle Star.

“If you’ve made the decision to sell/cash it in early, it would certainly be worthwhile to see if someone else will give you a higher value,” says Ferguson, although he adds that the “bigger question is why you’re selling”, given that many such products have terminal bonuses built in. So, by cashing in early, you will miss out on this.

Another option is to increase your monthly premiums, although you will first need to assess whether or not your provider will impose extra charges for doing so, which might wipe out the positive impact you’re looking for.

“I’d be reluctant to advise anyone to increase their premium into an endowment policy,” says Ferguson, “a lot of them weren’t particularly efficient. It would be throwing good money after bad. I’d be more inclined to advise people that if it looks like it won’t meet target, then put an additional sum somewhere else to make up your short-fall.”

And if your age permits, you could also look to extend the term of the mortgage to allow more time for the shortfall to be made up.