A LEADING independent analyst has warned that many homebuyers who took out endowments 25 years ago to pay off their mortgages are likely to be shocked to find themselves short of cash to pay off their home loans when their policies mature this year.

Despite bad publicity about the tarnished products a few years ago, Ned Cazalet of Cazalet Consulting believes a significant number of policyholders have failed to make alternative arrangements.

Insurance companies have been obliged to write regularly to customers over the past decade warning them, via a traffic light system, whether their endowments were on track, but Cazalet doubts these alerts have been effective.

Cazalet, who produces the industry’s most authoritative guide and is a regular thorn in the side of underperforming insurers, told the Sunday Herald: “I just don’t think everybody will have read this stuff or found it very meaningful. They will have dutifully paid the interest on their loans and their endowment premiums and will have assumed they were paying off their mortgage. It will be interesting to see what happens in the next few years as more and more mortgage endowments mature.”

Back in 1986, when policies maturing this year began, seven mortgages out of 10 were backed by endowments. More than 250,000 policies will mature this year and another five million by 2016.

The past few weeks have seen the usual raft of upbeat announcements from the big insurers when declaring the annual bonus rates on their endowments and other “with-profits” policies.

Standard Life said it was “pleased that most customers would see a year-on-year increase in the value of their plans”. Yet despite returns of around 13% from the market, many of its with-profits bonus rates have been cut.

Patrick Connolly of AWD Chase de Vere says: “It seems that, almost regardless of investment performance, many with-profits funds are still paying for mistakes they have made in the past and it is their policyholders who suffer. We can expect further reductions in bonus rates and payouts in the future.”

Standard compares its £50-a-month typical 25-year endowment payout, now at just over £28,000, to the £20,000 or so that would have been earned in a “typical building society account” over that time.

Royal London, owner of Scottish Life, says its latest endowment payout of just over £29,000 represents a return over the 25 years of 5% a year – or 1.8% after inflation.

But a decade ago, the same policy maturing with Standard Life was paying out £110,000. At Scottish Life it was £115,000. Top of the tree back then was General Accident paying out £119,000 – it is now £34,000.

Even in 2001, Standard Life was admitting that as many as half of its endowments would fail to meet their targets unless stock market returns averaged 6% going forward. In fact, stock market progress has been flat, yet salesmen were allowed to use the 6% figure – and even higher figures previously – to promise homebuyers not only that their mortgages would be paid but with a “nice lump sum on top”.

Scottish Amicable was one of the leading providers of endowment mortgage policies in the 1980s, when they were at the height of their popularity. Prudential, which acquired ScotAm in 1997, has outperformed most of its rivals in recent years, yet despite a strong year for its investments last year annual with-profits bonuses on its policies were left unchanged.

Payouts on endowments with ScotAm and several other big names have risen modestly this year, having fallen off a cliff since 2000 (Legal & General for instance is upping its benchmark payout from £34,486 to £34,750 – a rise of just £264.)

But the Pru admits 40,000 of the 42,000 ScotAm policies maturing this year will fall below their target. The average shortfall is £800. A quarter of the Pru’s own policies will also fall short, with an average deficit of £1700.

The “traffic lights” are flashing red across the market – Standard Life has 96% endowments on “red”, meaning below target, while Legal & General has 81% on red, 12% on amber (might pay it off) and 7% on green (definitely will). At Friends Provident, only 4% are amber and 3% green, while for Axa and Sun Life it is 71% red, 18% amber and 11% green.

When it became apparent that millions of endowments had been mis-sold, because buyers had not been warned of the market risks, many sought compensation, taking the opportunity to switch to repayment mortgages at the same time.

But not all took action, according to Cazalet. This appears to be confirmed by research by Aviva, which shows that while around 66% of its endowment customers have taken action and are not relying on their policies to pay their mortgage, it still leaves a third who are. Yet only 2% of Aviva’s endowment policies maturing in 2011 are on target. Aviva says it “recognises that not meeting the target amount will be disappointing for many customers”.

It could be more than disappointing for those who find they are still in debt to their bank or building society. It could present a major financial headache as they may well be at or nearing retirement.

Bernard Clarke of the Council of Mortgage Lenders does not believe there will be a problem. He accepts only that there may be “a small number of cases” where “borrowers will need to discuss their options with their lenders”. He adds, ominously: “In almost every case, it will be possible to devise a satisfactory solution that will enable the borrower to remain in their home.”

Will you make enough to pay off your home?

l CONVERT part of your loan to a repayment mortgage and take advantage of low interest rates

l SAVE in an Isa to create a separate fund to bridge the gap

l EXTEND your mortgage term to repay the shortfall

l AVOID paying more into your endowment or starting a new one