78 / 462
GAZETTE
APRIL
.
1993
Endowment contracts have a flexibility that makes it easy to adjust the premium on moving
house.
Interest is paid over the period thus:-
Yr. 1
2
3
4
5
6
7
g
9
10
11
12
13
14
15
16
17
18
19
20
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
819.00
433.00
Gross
Net
5880
4216
do
do
etc.
etc.
82199.00 56127.00
117600.00
84320.00
Costs for such mortgages may be summarised thus:
Total net
interest
plus repaid
borrowings
plus cost of
life cover
Total net cost
total net
56127.00
interest
endowment
49000.00
costs
3000.00
108127.00
84320.00
29810.00
114130.00
56
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.
B. Tax efficiency
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.
G Tax free lump sum
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.
D. Flexibility
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.