Endowment mortgages have received a bad press over the past few years because thousands of homeowners in Britain were left without enough money to pay off their home loans when the policies matured.

More than 80 per cent of all UK mortgages were endowment-based in the 1970s and 1980s, but cracks were only revealed when they matured after 15 to 20 years.

At the beginning of the 1990s, endowment mortgages were so popular in the Republic that one in three borrowers were taking them out. Although endowment sales were not as widespread as in Britain, some Irish homeowners will face shortfalls when their policies mature over the next decade if they do not increase contributions.

Under the Consumer Credit Act, insurance companies must regularly review each policy. If a shortfall is determined, letters are sent to the customer advising them to increase their premium payments.

Naturally, this situation enrages some borrowers who, when sold the product, were assured that the policy would pay off the mortgage and might even provide an additional lump sum.

Endowments defined: Of course, endowment mortgages seem attractive because they are loans with a built-in insurance and savings element.

A customer's premium goes towards interest - not principal - on the home loan and towards a payment to the life insurance company's endowment policy. The insurance aspect guarantees repayment in full upon the borrower's death.

Policy premiums are invested in a stock market-linked fund and this, 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.

Bonus blowout: In the past, insurers' bonus forecasts led customers to expect results that might not be achieved in the future. As a result of improved regulations since then, the insurance industry has become more conservative in the way it advertises future performance such as bonuses and terminal bonuses.

In fact, many companies are no longer providing information on terminal bonuses until maturity. The terminal bonus is completely flexible and projections may change yearly or even within the same year.

As such, a terminal bonus projection has absolutely no resemblance to the final bonus and it is not guaranteed.

However, customers should expect annual bonuses to be reasonably consistent, although there has been a downward trend in annual bonus rates since the economy moved into a lower investment rate environment. In general, endowment funds are still increasing each year but the rate of the increase is reducing.

Endowment mortgages do not guarantee that proceeds will be sufficient to pay the mortgage at the end of the day. In fact, the Consumers' Association of Ireland estimates that these funds must return at least 11 per cent a year just to cover the cost of borrowing, margins, fees and taxes.

The options: Any decision to switch out of an endowment mortgage depends on the length of time before the policy matures. If it is close to maturity, then the company can give a good indication of the final amount expected.

All endowment mortgage holders should establish whether there is going to be a problem at maturity. Customers may increase premiums to ensure the expected total is met or make up the shortfall elsewhere.

Lenders may allow an extension of the term of the mortgage to ensure the missing funds are made up before the end of the loan term. Failing this, borrowers may pull out of the mortgage and start again, but this may be counter-productive and expensive.

Before making a decision, endowment holders should consider consulting mortgage or financial professionals for advice.

It is also worthwhile discussing the situation with the lender as it was happy to accept this type of mortgage as a security initially and a customer should have a talk with them about restructuring.

The Consumers' Association of Ireland (CAI) strongly recommends against home-loan endowment mortgages.