Endowment Mortgages

“There is a big difference between real mis-selling and compliant advice, where performance has not met the return assumptions."

2005 - Mark Chilton, chief executive of Purely Mortgages

Why Endowment Mortgages Are A Warning To Private Investors

Why are you talking about Endowment Mortgages?

Because Endowment Mortgages have something in common with personal investment that investment funds usually don't have.

A fixed date when actions have to be taken regardless of whether or not taking that action is desirable or sensible.

The Endowment Mortgage was setup so that on a certain date an investment product would be worth such and such and that will be used to repay a loan with a fixed repayment date.

The personal investment also has such a date in the long term holding strategy, it has to pay your pension.

Endowment mortgages were very popular in the 1980s and 1990s

Put very crudely instead of paying off the mortgage over 25 years you just paid interest on the whole of the balance for 25 years.

The money that you "saved" by not repaying the capital was used to fund an investment product that would buy shares.

It was always very clear that at the end of the 25 year mortgage period that investment would cover the cost of repaying the mortgage and possibly leave you with a nice chunk left over as well.

The Reality Of Endowment Mortgages

What happened was pretty predictable, at the end of the 25 year period many of the endowment policies didn't provide the return needed to pay off the mortgage.

Put another way full time professional investors couldn't make the profit promised even with a continual stream of new money to invest and a well-defined 25 year time period.

Consider that again, the professional investment industry had a fixed date and the freedom to hold shares for 25 years and they still failed, yet the private investor is being told that shares should be held for the long term.

When many of these investments failed to yield enough money to pay off the mortgage the financial services industry and regulators did what they usually do.

The Industry's Response To Endowment Mortgages

They had reviews, changed some rules, blamed some of the problem on a rogue sector and some on customers for not understanding what they had bought.

What it did not do was to say this was an inherently a risky product that should never have been offered to many of the people that it was offered to.

It increased the interested paid to the lender because the borrower wasn't reducing the amount he owed, it meant commissions for the estate agent/financial advisor and possibly both for the investment product and it meant management fees for the provider of the investment product.

Given that the risk of the product underperforming meant that people could very easily lose their homes surely this meant that it was always going to be a niche product not something for the mainstream market?

The industry fell back on the argument of we told you it was stock market linked and you might not get what you expect. In most cases this was successful, the individual had to prove mis-selling, a very difficult task after 25 years.

By the time the advice and product was shown to be risky nearly everyone involved had been promoted, changed jobs, retired or was otherwise pretty much unaccountable.