The Gazette 1993

GAZETTE

APRIL . 1993

It can be seen that the endowment is dearer by £6,003. The fact that it is dearer does not however render it bad value; to justify the additional expense it must yield a surplus greater than the lost opportunity costs of the extra investment. The additional cost amounts to £300 net per year. If this were invested in a separate savings plan not attached to the mortgage and if this plan were to achieve a conservative return of 8% over the twenty year period it would amount to £13,728. To achieve a similar surplus an endowment plan must return 7.25% growth on premiums invested. This means that if similar returns are made on invested monies then the investor in the example given will be better off doing an endowment mortgage than if he/she simply did a repayment mortgage and invested the amount saved separately. Undoubtedly, the endowment method is more tax efficient in that relief usually begins to taper off in the repayment method around year 13. This will vary depending on the amount borrowed. For smaller sums relief will taper even sooner. However, the fact remains that in all cases the net costs are higher despite this efficiency. B. Tax efficiency Yes, there should be such a sum to enjoy at the end of the mortgage provided the growth is there. There is no guarantee of this, however, and in certain circumstances there may even be a shortfall. This is certainly a feature of unit linked endowment contracts and on moving house makes it very easy to adjust the premium and the period and perhaps the investment fund. A less welcome feature is the premium review clause which means that if the fund performs badly the borrower may be informed in any year after year 10 that their payments will have to be increased so as to meet their loan target. D. Flexibility G Tax free lump sum

Endowment contracts have a flexibility that makes it easy to adjust the premium on moving house.

Interest is paid over the period thus:-

Gross 5880.00 5798.00 5707.00 5605.00 5490.00 5361.00 5217.00 5057.00 4876.00 4674.00 4448.00 4194.00 3910.00 3592.00 3237.00 2838.00 2391.00 1891.00 1330.00 703.00

Net 4344.00 4262.00 4171.00 4069.00 3954.00 3825.00 3681.00 3521.00 3340.00 3138.00 2912.00 2658.00 2408.00 2213.00 1993.00 1748.00 1473.00 1165.00

Gross

Net

Yr. 1 2 3 4 5 6 7

5880

4216

do

do

etc.

etc.

g 9 10 11 12 13 14 15 16 17 18 19 20

819.00 433.00

82199.00 56127.00

117600.00

84320.00

Costs for such mortgages may be summarised thus:

total net

Total net interest

84320.00

56127.00

interest

endowment

plus repaid borrowings plus cost of life cover

29810.00

49000.00

costs

3000.00

114130.00

108127.00

Total net cost

56