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GAZETTE
APRIL
.
1993
The Right Type of Mortgage
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
growth will be required if the loan is
life rates they are aged between 30
to be met at redemption date.
and 40. We quote average premiums
on a guaranteed endowment contract
The idea that one can repay the loan
although the guarantees fall short of
at a discount is the great attraction
the full amount borrowed by about
for endowment borrowers. The cost
one half.
of this attractive feature is the
additional interest paid over the
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
The pros and cons of each method
one method of calculating the amount
repaid by a borrower in a repayment
Let us examine the benefits of
mortgage in any particular year.
endowments and then measure those
Although at the end of the repayment
benefits against the cost of providing
term the amount repaid will be the
them. In doing this we will assume a
same, these differences are quite
"typical" mortgage £49,000
substantial during the period and
borrowed over a period of 20 years
markedly affect the figures. Having
at a steady interest rate of 12% p.a.
made enquiry into the subject it seems
For tax relief purposes the loan is
that the most common method
advanced to a married couple liable
employed is loosely called the "annual
to income tax at the top rate and for
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
2
762.00
surrender values:-
3
853.00
4
956.00
5
1070.00
4322.00
5852
6
1198.00
7
1343.00
8
1503.00
9
1684.00
10
1885.00 11934.00
15947
11
2113.00
12
2365.00
13
2650.00
14
2967.00
15
3323.00 25348.00
31481
16
3723.00
17
4169.00
18
4670.00
19
5229.00
20
5857.00 49000.00
55847 (plus terminal
bonus)
(Continued overleaf)
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