Borrowers blowing pounds-1bn compensation cash New mortgage crisis as

BRITAIN'S homeowners could be heading for a new mortgage crisis, because they are spending endowment compensation payments of more than a billion pounds on holidays, new kitchens and other consumer purchases rather than tackling their debt.

Consumer groups, mortgage lenders and insurance giants are warning of major headaches ahead with hundreds of thousands of borrowers still unable to repay their loans on maturity, even after receiving cheques for thousands of pounds to cover any mortgage shortfall.

Up to March last year, insurance companies had received 452,000 complaints about endowment mis-selling and paid out around pounds-1 billion, according to the latest figures available from the Financial Services Authority. Those numbers will now be higher.

But lenders and insurers claim borrowers are not using this cash to reduce their mortgages, surrender endowments and get their loan back on track as the watchdog intends.

Rather, they are treating the payouts as a windfall.

Teresa Fritz, a spokeswoman for Which? , the consumer lobby group, warned borrowers they were running a big risk if they were simply spending the money.

She said: "If you only have around 10 years to go until maturity, there is not enough time to get back on track.

Borrowers could find themselves facing a nasty shock."

Norwich Union, Britain's biggest lender, claims that 70-per cent of customers who receive compensation are not surrendering their endowment policies.

Iain Glenn, NU's director of regulatory services said: "We keep a regular check on what is happening. These latest indications point to borrowers taking the cash, but not using it to sort out the mortgage. The only conclusion is that most borrowers are still relying on the endowment to repay the loan on maturity."

Skipton chief executive John Goodfellow is convinced the money is being spent on other things. He said: "Lenders should be seeing this money coming back in and we are not.

What is going to happen in 10 years' time when the mortgage matures and there is still a big shortfall? Who will they complain to then?

"People are looking on this money as a cash windfall. Who can blame them? If you have a young family, big expenses and someone sends you a cheque for a few thousand pounds, what are you going to do with the money? But what then happens in the future?"

His concerns are echoed by Matthew Bullock, chief executive of the Norwich and Peterborough Building Society.

He said: "I couldn't say we are seeing large flows of capital in or an increase in partrepayments."

The Financial Ombudsman's Service is also aware that the compensation is not necessarily being used as was intended.

Spokesman David Cresswell said: "There is anecdotal evidence that this money is being spent. These people must be quite clear about the risks they are running. We state boldly on our final documentation that they will not be able to complain again."

Even the FSA itself is aware many people are simply spending the windfall. At a key endowment tribunal, one of its own witnesses acknowledged compensation was being spent.

Roger Grenville-Jones, principal of Oxford Actuaries and Consultants, who was called by the FSA to give evidence supporting its claim that Legal & General had mis-sold endowments, said: "We deal with a number of customer complaints and we certainly know that a lot of people have been getting compensation and the money has been used as disposable money."

Building Societies Association director general Adrian Coles has added his warning to homebuyers of the danger of simply blowing the cash.

He said: "Some people are certainly spending the money.

They should think carefully about the implications. They must remember if they find themselves in trouble in 10 years time there will be no further compensation."

A judgement on the Legal & General case is due on Tuesday.

Copyright 2005 SMG Sunday Newspapers Ltd.
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