Comment: Stable door closes too late on endowment myth

Sir Bryan Carsberg's heart is in the right place, and it is certainly good to see him having a bash at the endowment mortgage scandal before he hands over to a successor at the Office of Fair Trading. He is, however, undoubtedly shutting the stable door after the horse has bolted.

The ferocious onslaught of bad publicity that has assailed the insurance companies and mortgage lenders over the last couple of years has more or less put a stop to the worst abuses. Of them all, churning, under which customers are sold new policies every time they move house, was probably the worst of the lot. It was theft by another name, and few people allow it to happen to them these days.

Pressurised selling has clearly not gone away altogether, however. Though well down on their peak, endowment mortgages still account for more than half of all new home loans. This is almost certainly a higher proportion than it ought to be. A few years ago, mortgage tax relief was available at the top marginal rate, which made endowment mortgages attractive to many people, even without a foot-in-the-door salesman hungry for commission.

With tax relief slashed and at today's interest rates and investment returns, it is hard to see a new endowment mortgage as appropriate for more than a small minority of homebuyers. The theory of an endowment mortgage is that the cost of maintaining the full amount of the original loan throughout the lifetime of the mortgage is compensated for by the investment performance of the endowment, which is meant to produce an inflated capital sum at the end. With a repayment mortgage, the cost declines through the lifetime of the mortgage as the loan is repaid.

Economics are now beginning to work powerfully against the whole idea of an endowment. Real interest rates are high, despite the fall to the lowest nominal rates in a generation. It is likely that the cost of the loan over 25 years will not be matched by the real returns on the endowment policy.

These returns have in any case fallen, as the insurance industry has repeatedly warned - and confirmed through regular cuts in bonus rates. It is therefore more profitable to pay off the debt as rapidly as possible, and that conclusion points to a repayment mortgage.

An endowment mortgage is only right for those who consciously want to make a major, long-term financial investment in the stock market at the same time as taking out a loan. And, of course, the interest-rate incentives offered to take out an endowment mortgage might actually tip the balance sometimes.

Whether it is right directly to regulate the sale of mortgages is another matter. Sir Bryan thinks transparency sufficient. He has rejected a system under which lenders would be told to offer best advice - lending what best suits the customer rather than their own commission income.

The effect of such a directive would be to extend the principles of financial services legislation into banking, and it would require a regulator to do it. The Bank of England and the Building Societies Commission have both made clear they do not want the job.

The jury is still out, but Sir Bryan could be right. Unlike the incomprehensible pensions industry, where even the best-informed customers require a lot of expert hand-holding, mortgages are an area where consumers should be encouraged to stand on their own feet and make decisions on the basis of caveat emptor. That means giving more information on which to base a choice. A good start would be to force every lender to hand prospective customers a shortened, non-technical version of Sir Bryan's excellent assessment of the merits of different types of mortgage.