Shop around for those mortgages

ENDOWMENTS

The predicted widespread condemnation of endowment mortgages failed to materialise yesterday when the Office of Fair Trading published its report on mortgage repayment methods. Instead, Sir Bryan Carsberg, director general, conceded that "for some people they are a very good buy".

But with 60 per cent of first-time buyers opting for endowment plans - ironically, the people least likely to benefit - Sir Bryan was quick to urge potential homebuyers to shop around for the best deal.

The OFT wants the industry to give borrowers more information with which to compare different products and it is urging lenders and independent financial advisers to accept a "best advice" obligation.

But, in calling for improvements in the selling practices of lenders and insurance companies, the OFT has accepted that things are not going to change for the better overnight. In the meantime, potential homebuyers should be seeking detailed information on mortgage products and comparing them with other deals in the market.

Eventually, the OFT wants to see different endowment products compared along three clear lines: projected early surrender values (most endowment policies are surrendered early); projected maturity values; and the assumptions about the investment growth rate of the fund.

While this information is not yet readily available at the point of sale, it is possible to obtain it from your financial adviser or the lender.

For example, a 25-year, £75-a-month with-profits endowment plan from Sun Life of Canada would be worth just £2,067 if surrendered after five years and £6,819 if surrendered after 10. That compares with £4,657 and £11, 652, respectively, on a similar policy from Standard Life.

The OFT also wants "with-profits" companies to show how past payouts and investment growth related to what had been projected. In the case of PEP mortgages - where the payments are invested in unit trusts and then allowed to grow in the tax shelter of a personal equity plan - it wants providers of PEP unit trusts to explain what steps would be taken to reduce their volatility, particularly near the end of the mortgage period. Ask also how these products would be handled if their tax treatment were changed.

When dealing with independent financial advisers, make sure they are fully aware of your financial circumstances. One of the key findings of the OFT report was that advisers should put a greater emphasis on personal factors, notably on the borrower's likely ability to withstand the extra risks, and costs arising from investment-linked repayment methods.

If you are going to be strapped for cash, a straight repayment mortgage looks the best option.

The report found that borrowers going into overdraft occasionally to keep up the often higher monthly payments with endowment mortgages could end up more than £3,000 worse off than borrowers with more resources.