Lender steering applicant to interest only mortgage


B

Big Les Wade

John Silver said:
What notifications have you had since about your provisions for finally
paying of the loan?
Presumably the house you bought is now worth at least three times the
buying price.
Oh, it's not a problem. We actually paid off our mortgage several years
ago using windfall funds from other sources. And we got a bit of
compensation for mis-selling, which helped top up the maturity value
(which was indeed well below the loan value).

I just wanted to say that we *were* promised that the endowment would
cover the loan. Not in writing, as Anthony, with his comfortable
monopoly-protected income, gloats, but then no investment company will
ever give you any promises in writing. They rely on your naivety
instead.

The trouble is, of course, that this and other well-publicised scandals
have killed their goose. The frantic selling of share-ISAs before the
2001 stock market crash; the banks and their PPI; the life insurance
scam; and especially the private pensions disaster, have demonstrated to
my generation that you never ever believe what these people tell you.
And we are being very careful to pass that warning on to the next
generation.

I always laugh incredulously when I hear government ministers or
financial industry gurus "warning" that people are not putting enough
into their pension pots. What? Hello? You expect us to put some *more*
in, after what happened to the last lot?
 
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®

®i©ardo

There never was and never can be any guarantee as to the value of an
endowment policy upon maturity.
Wrong. The basic sum assured was a guaranteed value of an endowment
policy on maturity or earlier death. If the contract was on a "with
profits" basis, then that guaranteed sum assured would be increased by
the added profits - which, once added could not be removed.
AIRI the provider/seller used to give two projections of estimated
maturity assuming 5% and 10% growth. The advance was then pitched
below the 5% figure.
But such a policy would not have been acceptable for a mortgage advance
because of the initial shortfall in the death benefit. To cover this
situation a combined endowment and decreasing term assurance policy was
used, whereby the shortfall was covered by the latter policy where
cover, in theory, reduced in time with bonus accumulations on the
endowment, thus maintaining cover at the level of the static loan.
 
®

®i©ardo

Actually they did all include a guaranteed minimum sum hidden somewhere
in the document that customers were provided with

usually, it was less than the accumulated payments

tim
Absolute rubbish. It gave a GUARANTEED DEATH BENEFIT which was equal to
the amount of the loan. That death benefit would have been paid if you
died after paying only one monthly instalment premium!
 
®

®i©ardo

My wife and I took out an endowment mortgage in 1990. We asked that same
question of the promoter, and the answer was quite definitely "Yes, and
a bit extra too."
I hope you got that in writing, given that long before that time it was
made quite clear that future bonuses were NOT GUARANTEED and "past
performance was no guarantee of future performance".
 
T

tim......

®i©ardo said:
Wrong. The basic sum assured was a guaranteed value of an endowment policy
on maturity or earlier death. If the contract was on a "with profits"
basis, then that guaranteed sum assured would be increased by the added
profits - which, once added could not be removed.
and which will be made up of an "annual" bonus and a "terminal" bonus

When I took out my policy the annual bonuses were of the order of 4-6% but
they were reduced to 2% during the 87-89 crash and never went up again all
through the noughties bomb when shares went up at 15% pa.

As for the terminal bonus, 20 years ago that was predicted to "double" final
value of my policy. Now it is predicted to add 5-10% if I am lucky - god
knows what happened to the difference between the above annual rise in
shares and the bonus that was added at the time.

One not impressed investor

tim
 
T

tim......

®i©ardo said:
Absolute rubbish. It gave a GUARANTEED DEATH BENEFIT which was equal to
the amount of the loan.
That's completely different to the guaranteed minimum payment if kept to
term

The death benefit is funded via a "normal" insurance policy, the premium for
which is taken out of the invested sum each month, and works on the basis
that 98+% of punters aren't going to die before the term ends.

The final value is funded by the expected investment gains
That death benefit would have been paid if you
agreed

That's got absolutely nothing to do with the guaranteed minimum payment if
the policy goes to term

BTW it's rude to shout - even when you are right
 
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®

®i©ardo

That's completely different to the guaranteed minimum payment if kept to
term

The death benefit is funded via a "normal" insurance policy, the premium
for which is taken out of the invested sum each month, and works on the
basis that 98+% of punters aren't going to die before the term ends.

The final value is funded by the expected investment gains
....plus the *guaranteed* sum assured under the endowment policy on which
those "expected investment gains" are based.

The total death benefit was funded by a combination policy which
embraced an increasing guaranteed benefit from the endowment element
with bonus additions, and a deceasing term assurance to protect the
shortfall of anticipated bonuses during the years of accumulation and
provide a sum sufficient to clear the loan upon death.
agreed

That's got absolutely nothing to do with the guaranteed minimum payment
if the policy goes to term
Very true, but your statement that the guaranteed minimum sum was:
"usually...less than the accumulated payments" is incorrect in the
circumstances that I described and would be so for the greater term of
the policy - and probably untrue for many that achieved maturity.
 
T

tim......

®i©ardo said:
...plus the *guaranteed* sum assured under the endowment policy on which
those "expected investment gains" are based.
No. The guaranteed sum is the minimum amount payable. If the investment
returns exceed this then more will be paid out, but the staring point for
these investment gains is zero, not the minimum guarantee.
The total death benefit was funded by a combination policy which embraced
an increasing guaranteed benefit from the endowment element with bonus
additions, and a deceasing term assurance to protect the shortfall of
anticipated bonuses during the years of accumulation and provide a sum
sufficient to clear the loan upon death.


Very true, but your statement that the guaranteed minimum sum was:
"usually...less than the accumulated payments" is incorrect in the
circumstances that I described
which was not the circumstances that I was repling to
and would be so for the greater term of the policy - and probably untrue
for many that achieved maturity.
No, it was not true for most that reached maturity. They may have paid
(will pay) more on maturity, but they didn't (don't) guarantee more on
maturity
 
P

Phi

Big Les Wade said:
Oh, it's not a problem. We actually paid off our mortgage several years
ago using windfall funds from other sources. And we got a bit of
compensation for mis-selling, which helped top up the maturity value
(which was indeed well below the loan value).

I just wanted to say that we *were* promised that the endowment would
cover the loan. Not in writing, as Anthony, with his comfortable
monopoly-protected income, gloats, but then no investment company will
ever give you any promises in writing. They rely on your naivety instead.

The trouble is, of course, that this and other well-publicised scandals
have killed their goose. The frantic selling of share-ISAs before the 2001
stock market crash; the banks and their PPI; the life insurance scam; and
especially the private pensions disaster, have demonstrated to my
generation that you never ever believe what these people tell you. And we
are being very careful to pass that warning on to the next generation.

I always laugh incredulously when I hear government ministers or financial
industry gurus "warning" that people are not putting enough into their
pension pots. What? Hello? You expect us to put some *more* in, after what
happened to the last lot?
Around 1,000 such complaints were rejected and The Financial Services
Authority investigated the rejected complaints, as well as Allied Dunbar's
internal procedures for handling such customer complaints, and while
maintaining a majority of them, it fined the company £725,000 on 11 March
2004 for mishandling such complaints. In its decision, the Financial
Services Authority noted that:

...complaint handlers had conducted poor quality investigations and
there was a failure to gather sufficient evidence to make a fair assessment
of both the consumer's attitude to the risk and the suitability of the sale.

Allied Dunbar stopped writing endowment mortgages in November 2001. It was
not the only company fined by the FSA, and at the time this was only the
fifth largest fine for offences related to endowment complaint
mismanagement. Friends Provident had been fined £625,000 in November 2003,
and five other firms had previously been fined a total of £5.2 million for
their mismanagement of such complaints. The largest fine fell to Royal
Scottish Assurance, which incurred a £2m penalty.
 
A

AndyW

My wife and I took out an endowment mortgage in 1990. We asked that same
question of the promoter, and the answer was quite definitely "Yes, and
a bit extra too."
Ditto (except it was 1989) and was also told I could pay off the
mortgage in about 18 years. Sadly they never wrote it down otherwise
misselling kerching :-(

Andy
 
M

Mark

My wife and I took out an endowment mortgage in 1990. We asked that same
question of the promoter, and the answer was quite definitely "Yes, and
a bit extra too."
If you took yours out in 1990 you should be protected by the FSA
scheme. I bought mine in the mid 80's before the protection existed.

We were also promised (verbally) that the endowment would pay off the
mortgage and give me some extra cash on top.
 
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R

R. Mark Clayton

Jethro_uk said:
In 1988, I was due to graduate, and with a friend looked into the option
of buying a house together (these were the days of MIRAS per-person ;) )
You had to be quick though it stopped in August 1988, and caused a temporary
spike in house prices...
We visited a few estate agents to get an idea of prices and one or two
estate agents recommended some financial advisers (I believe this was
stopped subsequently). They, along with our building societies were very
keen to sell us endowment mortgages. Not being at all financially savvy,
my friend and I asked how they worked.
Thirty years ago I got a mortgage off my bank. The manager sheepishly asked
if I would consider an endowment mortgate. "No" I replied. The main reason
they existed then was because the interest relief continued through the
whole mortgage, whereas on repayment ones it tapered off.
 
T

tim......

Jethro_uk said:
Thus jamming the housing market even further ?
what has whether or not people get compensation got to do with the housing
market/

tim
 
®

®i©ardo

No. The guaranteed sum is the minimum amount payable. If the
investment returns exceed this then more will be paid out, but the
staring point for these investment gains is zero, not the minimum
guarantee.
Agreed. The guaranteed sum at inception is the initial endowment sum
assured plus the value of the decreasing term assurance, which total is
the guaranteed death benefit which should be equal to the loan. Bonuses
are added to the endowment element year by year - and once added cannot
be removed - thus the endowment's guaranteed death increases year by
year. In theory the decreasing term assurance aspect should reduce by an
amount per annum at most equal to the "projected bonus values" added
rather than actual bonus payments, hence level cover, from a death
benefit point of view, should be maintained during currency of the policy.

That is the original basis on which these policies were first set up
which was by the insurance brokerage of one of the big five's banks in
order to provide a low cost remedy for bank staff housing loans on an
interest only basis. The criteria then were far, far stricter than in
subsequent years in terms of bonus projections, and had the original
model been adhered to there would have been far fewer of the subsequent
problems with these policies
which was not the circumstances that I was repling to


No, it was not true for most that reached maturity. They may have paid
(will pay) more on maturity, but they didn't (don't) guarantee more on
maturity
And who has said that they would?
 
®

®i©ardo

It appears from watching Channel 4 News on Thursday that the media are
already on the side of those who will be in the shit.
I hope that they remember that that their own financial pages were
giving such schemes glowing write ups in the 70'sand 80's.
John.
Hindsight is a wonderful thing!
 
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M

Mark

Agreed. The guaranteed sum at inception is the initial endowment sum
assured plus the value of the decreasing term assurance, which total is
the guaranteed death benefit which should be equal to the loan. Bonuses
are added to the endowment element year by year - and once added cannot
be removed - thus the endowment's guaranteed death increases year by
year. In theory the decreasing term assurance aspect should reduce by an
amount per annum at most equal to the "projected bonus values" added
rather than actual bonus payments, hence level cover, from a death
benefit point of view, should be maintained during currency of the policy.
I'm reasonably sure that my Endowment policy did not work like this.
If I died before the term I (i.e. my estate) would get the exact
amount specified on the policy, no more, no less. This would happen
whether the policy had been in operation for 1 month or was 1 month
away from the full term.

Otherwise I would get the sum assured, and any bonuses applied to the
policy.
 
S

S

Probably because it makes them more money. Imagine a £100,000 mortgage
over 20 years at 5% interest (for simplicity assume that the interest
rate does not change over the term of the mortgage).

For an interest only mortgage the borrower will pay back 20x£5000 in
interest plus £100,000 capital, a total of £200,000 at maturity.

For a repayment mortgage the repayment would be 240x£659.96, a total of
£158,390.40.

So for an interest only mortgage the lender would make nearly twice as
much profit than on a repayment mortgage.
This is merely a reflection of the fact that with an interest only
mortgage the principal balance remains unchanged, whereas with a
capital repayment mortgage it redeuces gradually to 0. The total
interest payable is proportional to the average principal balance
outstanding during the term of the mortgage.

I should also add that interest paid by the borrower is not the same
as the lender's profit.
 
S

S

I don't see how the banks can be punished for mis-selling interest only
mortgages. At the end of the current term, allow the customer to extend the
term and keep taking interest off them until they die or move on, then get
the capital repaid then.
One potential problem is that the customer retires and his income
drops and is not able to pay the mortgage any more. If you take home
£3000 a month, paying £1000 in mortgage interest is not unreasonable,
but paying £1000 from a £1500 pension is quite different.
 
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S

S

Indeed, that was our motivation ... there were repeated stories where
3,4,5 (more well off) students had clubbed together and managed to buy a
house together instead of renting, as each could claim MIRAS, whereas a
married couple only got one load of relief.
It was a lobng time ago but I think it was alway limited to 2 people.
 

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