More homeowners face the prospect of being told their endowment policy payouts could be too small to cover their mortgages, it emerged today.

City watchdog the Financial Services Authority (FSA) has written to life insurers urging them to make sure the rates they use when predicting how much a policy will be worth when it matures are in line with their investment holdings.

Insurers are in the process of writing to endowment mortgage holders telling them whether or not their policy is expected to be large enough to pay off their mortgage when it matures.

The letters are based on projected rates of investment returns set by the FSA at four per cent, six per cent and eight per cent for policies invested largely in shares which are subject to tax.

This means returns are expected to be about six per cent a year but could be higher at eight per cent or lower at four per cent - though it is possible they could be even higher or lower than these rates.

But the FSA said following stock market falls, many insurers had reduced the level of assets they held in shares, putting them into safer investments such as bonds.

It said that while, for some, this might only be temporary, firms which expected to keep their investment in shares relatively low going forward should use lower projection rates to reflect this.

Using lower rates was likely to mean more people received letters warning their endowment might not be large enough to pay off their mortgage, although this would give them more time to take action.

The move came as the regulator announced it would not be changing the projection rates it sets after it commissioned Price-waterhouseCoopers to look at current and future stock market conditions to see if they remained appropriate.

PricewaterhousCoopers decided that despite short-term volatility returns from shares were likely to outperform Government bonds in the long term by about three per cent to four per cent a year.

Monday June 23, 2003