Homebuyers who took out Legal & General endowment policies to repay their mortgages 25 years ago are set to receive surpluses averaging 40 per cent of the home loans their with-profit investments were intended to repay.

When the stock market fell heavily between 2000 and 2003 it became clear than many endowments sold at a time of high inflation and high interest rates would fail to pay off mortgages in a more difficult investment climate.

Insurance companies and brokers were forced to compensate homebuyers who claimed they were victims of mis-selling and send policyholders 'red', 'amber' and 'green' letters each year indicating the status of their endowments. Only the 'green' ones could confidently be expected to clear the mortgage in full. 'Red' letters were a warning of a shortfall and 'amber' indicated a possibility that there might be one.

The stock market's recovery in the past five years has improved the situation. L&G said yesterday that only 28 per cent of the letters it posted to homebuyers last November were 'red', down from 40 per cent in 2006. Forty-eight per cent were 'green', up from 37 per cent and the remaining 23 per cent 'amber' in both years.

L&G said a 25-year £50-a-month with profit policy taken out by a 29-year old in 1983 will pay out £44,966 when it matures next month. That represents a return of 7.9 per cent a year, or 4.4 per cent over and above inflation.

This real return is the same as last year for a policy taken out in 1982 matured for £45,399 - because its life span included one more year of high inflation.

"With profits has proved its strengths for policyholders this year in volatile investment markets," said Mark Gregory, L&G's with profits managing director.

Bonuses declared this year totalled £665 million, 12 per cent more than in 2006. L&G's sales of with-profit bonds - with no direct link to mortgages nowadays - increased by 25 per cent.