88% of Aviva mortgage endowment policies face shortfall

Only one in 25 policies will reach target

By Elliot Wright, 13th January 2010

Aviva - Britain's biggest insurer - has warned that nine in 10 of its mortgage endowment policies may not pay off customers' home loans.

The group (formerly known as Norwich Union) said that 88% of its 50,000 mortgage endowments policies were now in the "red" zone, meaning that there is a high risk they will not pay off the home loan they were purchased to cover. Just 4% of policies were labelled as "green" which means they are on track to reach their target - a fall of 2% since last year.

The announcement will be met with dismay by Aviva's endowment policy holders who had been hoping there investments would reflect last year's 18.6% rise in the stock market.

88% of Aviva mortgage endowments policies were now in the "red" zone, meaning that there is a high risk they will not pay off the home loan

This time last year, holders of a maturing 25-year mortgage endowment policy would have received a payout of £42,322, whereas this year they will only receive £36,979 - a decrease of 12.6%.

David Barral, Aviva's chief operating officer, attempted to play down any concerns. He said: "Although many endowments are not on track to meet the original target amount, we believe most customers have already taken action to cover any shortfall."

The figures also affect 1.6m customers who hold either pension plans or investment bonds with Aviva which depend on the company's main "with-profits" fund. And despite the strong stock market performance this only yielded an investment return of 6%.

However, with-profits funds traditionally hold back profits from good years so that they can still provide healthy returns during bad years - a process known as "smoothing".

Useful links:

How to get compensation for a mortgage endowment policy shortfall

With-profits funds

Claims Financial