ENDOWMENT mortgages are mortgages where the borrower takes out an insurance policy to pay off the loan.

Most of them were sold in the 1970s, 1980s and early 1990s when interest rates and investment returns were high.

This meant it was comparatively easy for the insurance policy to build up enough cash to pay off the mortgage.

At the peak of their popularity in 1988, endowment mortgages accounted for more than 80 per cent of all new mortgages.

In the early days of endowment mortgages, the regulator set the estimates of likely investment growth on endowments at a lower level of seven per cent and a higher level of 10.5 per cent.

These were the estimates lenders were supposed to use in helping borrowers to calculate what monthly insurance premium they needed to fork out in order to build up enough money to pay off their mortgage.

To date, endowment mortgages have actually performed very well.

A 25-year policy maturing this year has produced a return of 13 per cent over the life of the policy.

This means that, to date, endowment mortgages have generally not just paid off the mortgage, but provided a useful surplus into the bargain.

The problem is that the current investment background is very different from the high-inflation, high-interest rate climate in which double figure investment returns were readily achieved in the 1980s and 1990s.

With inflation, and interest rates, expected to remain much lower in the future, the regulator has decided to reduce the projections of investment growth on endowments.

The current levels are a lower rate of four per cent, a higher rate of eight per cent and a middle rate of six per cent.

On the projected lower levels of growth, some endowment policies now look unlikely to produce a big enough sum to pay off the mortgage they were intended to clear.

Last year, amid growing concern about possible shortfalls, the watchdog Financial Services Authority told the Association of British Insurers, representing the endowment mortgage providers, to send out letters to all 11 million policyholders setting out how likely it was that their endowments would not pay off their mortgages.

Of the 11 million policyholders some 40 per cent, or 4.4 million, are expected to get green letters, saying that their endowment is likely to be on track to pay off the mortgage if investment growth is 6 per cent or more.

The other 60 per cent, or 6.6 million policyholders, are likely to get red or amber letters. An amber letter will warn that investment growth needs to be between six and eight per cent to keep the endowment on track and that there is a possibility that the endowment will not pay out enough.

A red letter will say that investment growth of more than eight per cent will be needed to keep the endowment on track and that there is a high risk that the endowment will not pay out enough.

The first letters were sent out in April and the final ones will be sent out sometime next year. To date around half the required total have been sent out.

The 11 million endowment mortgage policies cover some six million households.

This is because some households have more than one endowment policy.

l If you have any queries about endowment mortgages, you should contact the Financial Services Authority Leafletline on 0800 917 3311. Factsheets are also available on the FSA's website at www.fsa.gov.uk