Endowment mortgages have suffered much criticism from the media in the last few months and their continued recommendation in the current financial environment has been called into question.Many of the arguments surrounding the pros and cons of endowment mortgages are the perennial ones of long term versus short term or low risk versus higher risk investments.

Ultimately the question is whether any individual borr ower has been given the best advice, including a full explanation of the advantages and potential disadvantages.When interest rates and consequent repayment mortgage rates were both high and volatile, the endowment sought to provide lower and more stable monthly payments, while ensuring that the debt would be fully discharged at the end of the mortgage period.

This was achieved by removing the capital sum owed into a fixed contribution investment plan (with associated life cover) that would generate that capital sum - and a potential bonus - on maturity.

Only the interest element was payable to the mortgage provider and that remained fully tax deductible up to the ceiling level declared by the government.The performance of such policies has generally more than justified their existence.

In a far different financial climate, the arguments about whether endowment policies should continue to be recommended include the following.-- Interest rates and repayment mortgage rates are lower and less volatile and house prices are both depressed and stable: so the pressure to lower monthly payments is less and the differential smaller.-- Investment performance during the recession was relatively poor, calling into question whether endowment funds will cover the capital sum on maturing, let alone providing any excess.

This situation primarily applies to low cost endowments where the achievement of the full mortgage sum is dependent on the accumulated value of bonuses declared each year.-- The penalties on surrendering an endowment policy in its early years are heavy.-- There are now additional financial instruments which can be used to cover the capital sum in an interest only mortgage arrangement - most noticeably PEPs which also enjoy tax advantages.Providers of financial products have to ensure a highly secure level of performance over a period that spans four or five cycles in the movement of equities, inflation, interest rates and property values.

Fund managers are performing a delicate balancing act that seeks to gain some benefit from short term up trends, while minimising the negative impact of down trends.

In doing so, they are always likely to be out-performed by higher risk, shorter term products that seek to maximise the return from up trends and then to escape before the fall back.Fund managers with shorter term objectives are at an advantage in the current period of rapidly rising equities coming out of recession, while government borrowing requirements are maintaining reasonable returns on gilts.But, within a relatively short time, we could be experiencing higher inflation and interest rates, with many challenges ahead in the global markets within which companies seek to improve their performance and share ratings.Even for a low cost endowment policy bought at the height of the recession in 1992, and assuming current modest bonus levels are maintained for the entire duration of 25 years, it should still be possible to achieve a maturing total equivalent to 125% of the mortgage.

Although the real value of the extra 25% when inflation is taken into consideration may be limited, at least the mortgage will be repaid.

The endowment fund manager needs to achieve something like a 9% per annum return to meet the mortgage amount.

Over the last ten years, the return may have been as high as 20%; and, even during the last five years including the recession, 12% has typically been achieved.

Past performance is not necessarily a guide to the future; and the value and income derived from a unit-based fund can fall as well as r ise.An even clearer indication of what the with-profits fund manager needs to achieve on a continuing basis is the margin over the mortgage rate.

For a mortgage of £30,000 attracting full 25% tax relief, the endowment needs to achieve a gross return 1.4% higher than the gross mortgage interest rate to show a benefit over straight repayment.

For a £45,000 mortgage, this rises to 3.2%, but both figures are well inside the margins historically achieved.

(Tax relief will be reduced to 20% from April 1994 as announced in the spring budget.)So, with careful selection of the life office underwriting the endowment, the current scare stories are certainly exaggerated.

The following general benefits have also always applied.-- The ability of the endowment to smooth stock market fluctuations.-- Participation in significant market upturns through a balanced portfolio offering low risk.-- Maximum tax relief throughout the mortgage term.-- The potential to accumulate substantial bonuses realisable at maturity.-- The ability to transfer the endowment (with a top-up policy if necessary) when moving to a new property, in contrast to repayment mortgages which must be settled in full at each move and new loans arranged.

However, you cannot actually withdraw capital from the endowment to help fund a move inside the original endowment term without incurring significant penalties.Even so, is an endowment likely to be the best recommendation against alternatives at this particular time? Recent criticism has directed its attention to rival interest only schemes which use alternative vehicles to cover the capital debt.Some more sophisticated investors would like the ultimate flexibility of determining how they save for the capital sum while paying interest only to the lender.

This can be difficult to achieve except in specific, personal circumstances since, from the lender's point of view, there is no longer the guarantee that the underlying property asset will not be in a state of negative equity if the borrower defaults.As a result, any loan is likely to be limited to a smaller percentage of the property valuation.

However, this approach may well be appropriate - with proper advice - for very large mortgages where the borrower is very familiar with complex and higher risk investment arrangements.Some lenders have, however, endorsed schemes linked to PEPs and, because of the advantageous tax position, this does currently have considerable attraction.

However, the level of risk is generally higher, the array of PEP providers daunting to all but the professional, and their relative performances may well prove to be volatile in the longer term as they jockey for position in widely published league tables.It is a market which is maturing, though - products that include life assurance as part of a package specifically targeted at mortgage debt (as with endowments) are a recent innovation.

This option should be considered as part of the evaluation and recommendation process.There are also packages linked to pensions which may again appear attractive at first sight.

However, as a general principle, it is difficult to square the concept of 'best advice' with the idea of mortgaging retirement income.

The vast majority of people already have a significant problem in maintaining anything like their desired standard of living on retirement with whatever pension provision they have made, let alone diminishing it further to finance an asset which can no longer be guaranteed to show a significant capital gain through rising property values.The one issue that cannot be denied is that of early surrender.

The very nature of the endowment principle means that the potentially significant benefits are only realisable when the investment is allowed to run its full term.

In the early years, the fund will be very small and, depending on the investment climate at the time, may have shown little growth or even a loss if surrendered: management fees will also seem disproportionately high.

Many financial instruments - and especially those with high security, significant guarantees and long durations - are front-end loaded in terms of management costs and provide similarly poor value when trying to withdraw prematurely.The other inherent problem with endowment mortgages is that the concept of splitting the loan into its capital and interest elements and then treating them separately through two different suppliers is complicated.

Most people are not familiar with the intricacies of the financial markets and a heavy onus is therefore placed on the adviser or lender to make sure that the borrower fully understands the options and associated points that require careful consideration.

Undoubtedly, the issue of early surrender has become prominent because the recessionary environment in recent years has seen more people lose their jobs and ultimately default on their mortgage payments.

Faced at that stage by the additional penalty of early surrender of an endowment policy, individuals have rightly complained that they did not have these risks adequately explained to them at the outset.The independent financial adviser must fully explain all recommendations in the process of complying with the 'best advice' principle.The endowment still has a role to play in the long term planning of mortgage repayment.

Bonuses may well remain lower through the 1990s, but a well managed with-profits fund should still be able to more than cover the underlying debt with a high degree of security and relatively low and stable monthly repayment charges.

The situation is less clear-cut than it was, however, and the need for proper, independent advice, particularly in the following areas, is all the more pressing.-- The further one gets above the £30,000 tax limit, the more closely the suitability of endowment should be considered, as an interest only mortgage with the capital sum funded by an alternative vehicle may be a better option.-- Shorter term contracts (eg ten years) also need careful consideration because the long term smoothing benefits of the endowment are that much diminished.-- The fund management record of the life office should be well scrutinised.-- PEP-based schemes should be evaluated depending on the borrower's attitude to risk.-- Avoid endowments altogether if any likelihood of early surrender is identified or when the lack of sophistication of the borrower suggests that he or she may have difficulty in adequately understanding the conditions that attach to them.