Dealing with an endowment shortfall

Endowment providers send review letters – also called ‘reprojection letters’. You should have received one with your annual endowment policy statement. Your review letter tells you whether your policy is on track to repay your mortgage with a traffic-light system:

• red: if there’s high risk your policy isn’t on track
• amber:  if there’s a significant risk it’s not on track
• green: if it’s currently on track to repay your mortgage.

The letter will also tell you:

• the size of the estimated shortfall
• your options
• actions you need to take.

If you haven’t received your letter, contact your policy provider immediately.

If you have been getting them regularly, you need to check the latest one, even if the policy has been on track in the past – this is because the policies are linked to investments that can vary in value.

If your letter is red, you need to do something straight away (and if it’s amber you need to monitor it closely). Use our checklists:

• ways to make up an endowment shortfall
• if your mortagage is close to ending with a shortfall
• if you're about to retire with a shortfall

Talk to a financial adviser before cashing in your endowment or stopping any other financial plan as a way of raising funds to reduce your mortgage capital – otherwise you could lose out financially.

If you’re currently on track to pay off what you owe, but are not comfortable with the risk of a potential future shortfall, you may be able to switch from your interest-only mortgage to a repayment mortgage. Contact your mortgage provider.

In the meantime, it’s worth considering a back-up to your investment – do you have money you could save to build up a buffer?

The quickest way may be to use all the money from the endowment to pay down the mortgage, then discuss converting what you still owe (the shortfall) to a full repayment mortgage.

You might be able to carry on with your previous monthly payments until the shortfall amount is paid off. Or, if money is tight, you might be able to agree lower payments over a longer time. If you extend the term of your mortgage though, you will pay more interest over the full term.

Extending the term into your retirement is not a good idea unless you’re sure you can afford it, and you might have to meet the lender’s affordability criteria when arranging new mortgage payments.

As long as you keep up the new agreed mortgage payments, you shouldn’t lose your home because of the shortfall.

If other options aren’t affordable, you need to contact your lender as soon as possible to discuss your situation. They’ll be able to work with you to try to come to a manageable solution.

A more drastic solution would be to sell your property and buy a cheaper one to release funds to cover the shortfall.

This is a last resort for many people and there are no guarantees that you will sell your home for a price you expect.

You have grounds to complain if your adviser did not:

• tell you how your money would be invested and explain the risks
• explain that an endowment policy is a long-term commitment that often gives a poor return if you cash it in early
• check you were comfortable with the risks of your money being linked to investment performance, including the stock market
• check whether it was likely that you’d be able to keep up payments until the end of the mortgage
• explain any fees and charges, and how they would affect the return on your savings.

You might also be able to complain if:

• your endowment policy finishes after you retire – and the adviser didn’t check you were likely to be able to afford the premiums once you retired
• you were advised to cancel one endowment policy and take out another
• your endowment policy runs on after your mortgage is due to finish
• you were given a guarantee that the endowment policy would pay off your mortgage – but only if you can show you were told it was guaranteed to pay out enough to pay off your mortgage and this was part of the legal contract between you and the firm.

If you feel you have been mis-sold your policy and want to make a complaint, it’s free.

First, contact the business that sold you the endowment policy in writing. This might be a financial advisory firm, a mortgage lender or an endowment provider.

Try to pull together as much documentation as you can find and write down your grounds for complaint.

If you can’t find the paperwork you can request it from your endowment company when you file your complaint.

The firm has eight weeks to respond. If you’re not happy with the outcome, you can go to the Financial Ombudsman ServiceOpens in a new window for free.

There are time limits on these complaints. Usually you need to complain within three years of receiving a red letter warning you of a high risk of a shortfall. You’ll get a letter from your company six months before the time limit to complain is up. For other colour letters, the time limit is different.

After the firm has investigated your complaint it should give you a final decision within eight weeks, and this might include an offer of compensation.

If you’re not happy with the response, you can make a complaint to the Financial Ombudsman Service within six months of getting a ‘final response’ letter (or longer if the firm hasn’t sent you one). The Ombudsman service will look independently at your case and is free.

There’s no need to pay a broker or a claims management company – using these companies doesn’t increase the chances of your complaint succeeding and if you do get compensation, you may end up with less money to pay off your mortgage.

Once the Ombudsman decides, you can choose to accept the decision (which the firm must also accept) or if you’re still unhappy, you can take it to court. But that will cost you legal fees.

If the adviser or company that sold you the endowment no longer exists, you might still be able to get compensation.