What is an Endowment Mortgage?
This is an interest-only mortgage linked to an investment product. Most consumers who bought one were told that the policy would eventually pay off the mortgage at the end of its term and provide an additional lump sum. However millions of people now have a shortfall with no lump sum, in many cases, an endowment product’s return was insufficient to pay the outstanding mortgage.
Obligations of the Adviser or Sales Person for mis-sold Endowment Mortgages
- Thoroughly ascertained the consumer’s circumstances and requirements by completion of a fact find and act upon this information
- Ensured that the consumer was aware and accepted the risk of the policy.
How was this product mis-sold?
- They were made to look cheaper than repayment mortgages
- The payment amounts were often set up at a low level with the consumer as they were encouraged to expect unrealistic investment returns
- Consumers were not made aware of the risks associated with the product
- Information was misleading and unclear
- Note: Endowments paid large commissions to advisers meaning they were heavily incentivised to sell them.
The Financial Ombudsman Service (FOS) has issued technical guidance for calculating redress for mis-sold Mortgage Endowments.
- Compensation is intended to put the consumer in the position they would be in if they had never taken out the endowment policy.
- Usually this would be their position if they had taken out a repayment mortgage.
- Compensation should include paying any mortgage switching fees or early repayment charges, or any extra amount for replacement life insurance if appropriate.
The calculations for redress are complex – usually they will compare
- The total paid in endowment premiums and interest
- With the total payments that would have been made on an equivalent repayment mortgage
This gives the payment comparison part of the calculation
- The current surrender value of the endowment policy;
- With the amount of capital that the consumer would have paid off a repayment mortgage
This gives the capital comparison part of the calculation.
Together these calculations show the overall loss faced by a consumer. Any savings made are a bonus and not taken into account – unless they have been put aside into a separate savings plan.
The calculations must take into account circumstances where there is a difference in the timescales of the mortgage and the endowment, or where the consumer has surrendered their policy, or paid off their mortgage.