More than 40 per cent of endowment mortgages look set to fall short of their target value - but for most people this is not a problem, according to new research.

The Association of British Insurers (ABI) said 42 per cent of people who had endowment policies had received a red letter since July 2001, meaning their policy was currently not on track to pay off their mortgage.

It added that 31 per cent of people had received green letters saying their policy was on track to reach its target and 27 per cent received amber ones, warning they should take action as there was a risk the policy would not be large enough to pay off their mortgage when it matured.

But the ABI said many endowments were no longer linked to paying off a mortgage as holders had often made other arrangements for repaying their home loan or already paid it off and the policies were now being used simply as savings plans.

It said 70 per cent of people who had an endowment policy that was still linked to a mortgage said their policy was either on track to pay off their loan, or they had savings they intended to use to cover a shortfall.

This was backed up by research carried out by City watchdog the Financial Services Authority, headed by Howard Davies, which found 84 per cent of people with one of the policies said it was either on track to pay off their mortgage or the projected shortfall presented them with little or no financial problem.

An ABI spokeswoman said: "The reprojection letters are designed to encourage people to take action and this appears to have happened.

"It is fast becoming impossible to draw reliable information from the letters."

She said the data was distorted as some companies sent letters out more frequently than others while the figures also included policies that were no longer being used to pay off a mortgage.

Friday March 28 2003