Thousands of homeowners who have been sold endowment mortgages without any means of repaying them should be fully compensated, a leading financial watchdog has said.

The Financial Ombudsman said hundreds of official complaints are made every year by holders of endowment mortgages who can find no trace of an endowment policy.

Unnoticed, the absence of a policy could leave them with the entire mortgage to repay - just when they thought it was finally paid off.

Holders of endowment mortgages pay only interest on the original loan.

They repay none of the actual amount they borrowed until the loan matures - typically after 25 years.

Long term aims

Instead they invest in an endowment policy, where extra money is invested by a life insurance company on the stock market.

The hope is that after 25 years the investment will be worth at least enough to repay the original loan.

There is already been great concern over "endowment shortfalls".

More than 3 million homeowners face the likelihood that their endowment policy when it matures will be worth too little to pay off the mortgage.

Apportioning blame

But far from falling short, thousands of homeowners have no endowment policy at all.

A spokesman for the Financial Ombudsman said: "In the vast majority of cases we look at we find the lender is 100 per cent to blame.

"In many others it is the fault of the solicitor who arranged the mortgage."

He said most of the borrowers in this position only realise they have no endowment policy when they move house - typically after three to five years.

They then find themselves needing to find a big lump sum to get back on course to repay their loans.

Depending on the wording of mortgage contracts, most lenders should check to make sure borrowers have a vehicle in place to repay their loan - such as an endowment policy.

Lenders' claims

The Financial Ombudsman issued guidance today saying lenders must put borrowers back in the position they would have been in had a policy been arranged in the first place.

Until now, lenders tried to claim that borrowers without a policy had saved money because they had not had to pay into an endowment policy.

They then deducted whatever they had saved from the compensation they paid.

But the ombudsman says in most cases borrowers would have simply looked at monthly payments and assumed the lender had got it right. So it was wrong to reduce compensation.

Borrowers with a successful complaint typically get between �3,000 and �10,000 in compensation, depending on how long they have held the mortgage.

Homeowners who hold an endowment mortgage without having a policy in place should first contact their lender to see if they are owed compensation.

Failing that, they can contact the Financial Ombudsman on 0800 080 1800.