A new wave of red endowment re-projection letters is set to drop on the doormats of already financially-harassed homeowners.

The financial watchdog, the Financial Services Authority (FSA) has instructed providers they must tell policyholders if they have invested a greater share of funds in low-yielding bond markets.

They said firms must not use "inappropriately high rates of return" when writing to endowment mortgage policyholders, giving them the false impression they were well on track to repay their mortgage.

Many homeowners have already been warned that their endowment policy will not be worth enough to pay off their mortgage debt, but this week's announcement raises further worries that more homeowners than first thought are likely to face an endowment shortfall.

Endowment prospect calculations are based on rates of investment return set at 4%, 6% and 8%.
But stock market falls over the past few years have led to companies shifting from shares to safer investments such as bonds.

But, according to the FSA, these companies could be missing out on the historically high long term rates of return offered by shares and have issued a letter to all companies requiring those that have altered their investments towards bonds to advise homeowners of the new risk.

However, the FSA said it was not changing the rates firms may use to illustrate possible returns as the stock market can be expected to outperform government bonds by three to four percent per year over the long term.

The FSA recognises that companies may plan to switch back but it warned, “reduced rates of return must be used if the firm considers that those rates overstate the product's investment potential."

Homeowners who have a good length of time to run on their endowment will be advised to pay extra to ensure that the mortgage can be paid off. Those who only have a short time to run or those that have downsized but kept on the endowment to boost a small pension will be hit hardest.