The Gazette 1993

APRIL . 1993

GAZETTE

The Right Type of Mortgage

life rates they are aged between 30 and 40. We quote average premiums on a guaranteed endowment contract although the guarantees fall short of the full amount borrowed by about

growth will be required if the loan is

to be met at redemption date.

The idea that one can repay the loan at a discount is the great attraction for endowment borrowers. The cost of this attractive feature is the additional interest paid over the

one half.

A. Net cost

period of the loan on a non reducing balance.

One of the difficulties in making valid comparisons is that there is more than one method of calculating the amount repaid by a borrower in a repayment mortgage in any particular year. Although at the end of the repayment term the amount repaid will be the same, these differences are quite substantial during the period and markedly affect the figures. Having made enquiry into the subject it seems that the most common method employed is loosely called the "annual

The pros and cons of each method

Let us examine the benefits of endowments and then measure those benefits against the cost of providing them. In doing this we will assume a "typical" mortgage £49,000 borrowed over a period of 20 years at a steady interest rate of 12% p.a. For tax relief purposes the loan is advanced to a married couple liable to income tax at the top rate and for

by *Fergus Goodbody

There will be relatively few of us who have not by now been thoroughly confused by conflicting claims of mortgage providers or thoroughly alarmed by reports of dismal returns from endowment policies. With repayment type loans a composite amount is paid on a monthly basis to the lender consisting of capital and interest. With endowment type loans two separate monthly payments are made; one to the lender being interest only on the amount borrowed, the other to a Life Office which invests the money on behalf of the borrower to make it grow in an "endowment" or savings plan so that not only will the money be repaid to the lender but also a surplus will be available to the borrower. The original amount borrowed will remain owing in full to the lender until the agreed repayment date at the end of the agreed term. The sum total of "capital" paid to the insurance company in monthly instalments will normally be less than the amount of the loan and some element of

rest" method. Using this method annual payments would be as follows:- Repayment Endowment £6560 £7370

(of which plan costs are £1490 pa)

Capital paid over the period is as follows:- total Yr. 1 680.00

nil, but estimated surrender values:-

762.00 853.00 956.00 1070.00 1198.00 1343.00 1503.00 1684.00 2113.00 2365.00 2650.00 2967.00 3723.00 4169.00 4670.00 5229.00

2 3 4 5 6 7

5852

4322.00

8 9

15947

1885.00 11934.00

10 11 12 13 14 15 16 17 18 19

3323.00 25348.00

31481

5857.00 49000.00

55847 (plus terminal bonus)

20

(Continued overleaf)

55