Although Irish consumers are more savvy than in the past, some endowment mortgage holders are still saddled with decisions they made more than a decade ago when financial regulations and information were not as consumer-friendly as they are today.

A reader from Malahide, Mr H is one such consumer. After recently receiving information from his endowment mortgage company, Royal Life in Ireland, concerning the performance of his "with-profits" endowment mortgage he was enraged. Mr H sent Family Money a copy of this letter in order to highlight some of the difficulties faced by those who took out this type of mortgage in the last 10 to 15 years.

This issue is not new but for those left holding the endowment mortgage it is still an understandably distressing situation.

An endowment mortgage seems attractive because it is a loan with a builtin insurance and savings element. Like an annuity mortgage, when the premium is paid a percentage goes towards the loan repayment. However, the loan itself, or the principal amount, is not paid during this period. The rest of the premium goes towards mortgage protection insurance that guarantees repayment of the mortgage in full upon the borrower's death.

Another portion goes into a savings fund that, if growth conditions are appropriate, will provide a lump sum to pay off the mortgage principal at the end of the term with possibly some money left over. As always, the "if" in this statement is the one causing borrowers the most problems.

Endowment funds were hit by the slump in world stock markets in the early 1990s and in 1998. Unfortunately, this downward trend coincided with the increasing popularity of endowment mortgages in the late 1980s, peaking in 1992-1993 when four out of every 10 borrowers took out this type of policy.

In 1986, our reader invested in a "with-profits" endowment mortgage policy. This type of policy invests in the life assurance company itself, which in this case is Royal Life. The company then invests these funds over time.

In general, "investment is made in a range of assets: some equities, gilt, some property in varying proportions. There would be a reasonably-sized gilt component because in a with-profits, growth is locked in each year," said Ms Jennifer Hoban of the Irish Insurance Federation.

"There is a guaranteed element to it, so irrespective of what happens between now and maturity you will get that amount. That's why you have gilts involved somewhere," she said.

Gilts are treasury securities, a conservative fixed-income product that guarantees the principal while providing a small return.

With-profit endowment mortgage bonuses are declared each year and cannot be taken back by the company. The amount is based on the profits made on the basket of investments each year. A terminal bonus is also declared at the end of the mortgage term.

In his letter, Mr H outlines his reaction to the profit information he received from the company regarding these bonuses. "I was extremely shocked and concerned to discover that the basic bonus rate, which has been dropping alarmingly since 1992 has plummeted by 36 per cent in the last year alone. It has now dropped a total of 59 per cent since 1991."

In the Royal Life literature, he said, it states that investments include a range of British and international shares, together with other assets including fixed-interest securities and property.

Mr H finds it hard to believe that these funds have done so poorly since both property and equities have done so well. "I therefore cannot understand how this fund has performed so badly."

Mr H also expresses concern that he will be unable to pay off his mortgage. "To my amazement, I discovered that the terminal bonus rate had dropped from 43 per cent to 32 per cent, a drop of over 25 per cent in one year. This had the effect of reducing the potential maturity value of the policy by approximately £5,000. I am aghast that you have effected a change of this magnitude and have made no attempt at all to communicate this to your policyholders." He adds that he received a "total projected surplus cash sum" of £30,730 from the salesman and assurances in the literature that although future bonus rates could not be guaranteed, "there are very strong reasons for having confidence in the continuing profitability of the plan".

A spokesman for Royal Life said that the company could not speak about specific cases. In general, however, "the expectations of policyholders are expectations that must be based on reasonable grounds. The rules that we've all adopted have changed over the years precisely to try to avoid a loss of expectation by our policyholders," he said.

"An endowment policy on a with-profit basis is not the same as an equity investment. I honestly believe that nobody has ever said or given any indication that a with-profit endowment mortgage reflects the equity market. It's invested in a basket of investments, so anyone who believes it reflects the equity market is mistaken," said the spokesman.

In the past, the forecasting of bonuses "led to an expectation that might not be achieved in the future". As a result, it was felt that when selling products, the proper thing was not to give terminal bonuses or estimates when policy is in force.

The insurance industry in general has become more conservative in the way it forecasts future performance like bonuses and terminal bonuses, says the IIF's Ms Hoban.

"Many companies are no longer providing information on terminal bonuses. One would hope that annual bonuses would be reasonably consistent. The terminal bonus is completely flexible and projections may change from year to year or even within the same year. The terminal bonus projection has absolutely no resemblance to the actual terminal bonus. It's also not guaranteed. They only show the terminal amount when it's just about to mature."

The aim of an endowment mortgage is to provide consistent growth. "You wouldn't expect to see the same peaks and troughs as that in a stock market index," she said. There has been a downward trend in bonus rates since the economy moved into a lower inflation rate and a lower investment rate environment. In our reader's case, "the policy is increasing each year but the rate of the increase is reducing," she said.

With an endowment mortgage there's no guarantee that the proceeds will be sufficient to pay the mortgage at the end of the day. The mortgage holder is taking a bit of a gamble because they're putting the money into an investment policy to pay the mortgage and hoping to have some left over.

Unfortunately, in the 1980s and early 1990s "a lot of verbal assurances were made but there are flagging bells that these are not a guaranteed product", said Ms Hoban.

"Since the policy was taken out in 1986, insurance companies are now more conservative in their projections," she said.

In terms of our reader's options, she says much depends on the length of time before the policy matures. If he's close to maturity, then the company can give him a pretty good indication of maturity amount. "He needs to establish whether there is going to be a shortfall. He should increase the premiums to make sure it's met or make up the shortfall from elsewhere. The lender may let him extend the term of the mortgage."

Mr H could pull out of the mortgage and start again, but it might be counterproductive and expensive.

The reader should consider consulting professionals for advice. "It's worthwhile talking to the lenders. They were happy to accept this as a security initially and he could have a chat with them about restructuring," she said.

However, payments may be higher in a new mortgage.

If he decides to forego this option and rework the mortgage in another way, he still has an obligation to inform the lending institution, she said.

It's important to get an up-to-date picture. Under the Consumer Credit Act, an audit of the policy is required at regular intervals. Therefore, the company should be in a position to tell him whether the current premium level is sufficient to pay off his mortgage.