The Association of British Insurers (ABI) yesterday confirmed fears that the endowment trap had snared more mortgage borrowers than was previously thought and indicated that the despatch of the second set of letters informing mortgage endowment policy holders of the progress of their savings plans was now well underway.

These letters inform policyholders of the latest projections of their policies, and indicate whether they should take action to deal with any possible future shortfall resulting from current predictions of future interest rates.

This second set of letters will, at 10.2 million, be smaller in number than the first, reflecting a reduction of around half a million in the stock of endowment policies held in the UK. This is consistent with recently-published ABI statistics showing a continued reduction in sales of new policies.

The letters cover all kinds of low-cost mortgage endowments, including unit-linked and with-profits. Some 1.25 million have so far been sent as part of the second batch. Of this first sample, 39% were green (currently on track), 26% were amber (suggest you consider taking action) and 35% were red (encourage you to take action).

However, the ABI pointed out that yesterday's figures cannot be taken as a representative sample because they will be influenced by the relative balance between different companies and different kinds of policies. The percentages are therefore likely to change and any estimate of the total shortfall that policyholders will face is highly speculative.

The ABI said that a slowing in the rate of growth of endowment policies is to be expected following the recent relatively poor performance of the stock market, and reflects a decline in investment returns generally. The ABI were also quick to raise the point that consumers faced with lower investment returns are at the same time benefiting because interest payments on their mortgage are lower as a result of low inflation and lower mortgage rates. All endowment mortgages comprise two elements: a payment into an investment 'pot' and interest payments on a loan.

Between April 2000 and March 2002, average mortgage interest rates fell from 7.74% to 5.75%. This caused net payments on a £50,000 interest only mortgage to fall by £83 per month, or £996 per year. That amount invested into repaying the existing mortgage over a ten-year period would produce a return of £13,360 at current rates.

The ABI said that people who receive a letter suggesting that they take some action should seek advice from a financial adviser. Endowment policies are long-term savings policies and there are a number of practical options open to people with a projected shortfall. Interest rate cuts in recent years have meant an increase in the amount of money available in monthly household budgets. Policyholders with a projected shortfall will often be able to invest the money saved from lower interest rates to increase savings to address any shortfall on the endowment.