4.8 ‘Benefits’ — ‘Sleight of Hand’
The comparison between the Endowment Mortgage and the Repayment Mortgage is tabulated in the SUMMARY OF BENEFITS in the First National HOME MORTGAGES explanatory pamphlet (see Appendix 1/1). This comparison clearly shows the Benefits pertaining to the Endowment Mortgage as being in excess of those pertaining to the Repayment Mortgage.
But the most important Benefit pertaining to a Repayment Mortgage is that ‘Your Loan Will be Repaid’ within the Mortgage Term.
Because First National did not deem it necessary to highlight this Benefit on their Summary of Benefits comparison table, one would be led to believe that this Benefit was already balanced by a similar equal Benefit pertaining to the Endowment Mortgage; i.e. with the Endowment Mortgage, ‘Your Loan Will be Repaid’ within the Mortgage Term. This is the clear impression given.
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You will note from the First National HOME MORTGAGES explanatory pamphlet that the Summary of Benefits shows two additional Benefits associated with the Endowment Mortgage that are absent with the Repayment Mortgage: the Possible Lump Sum at the end of the loan period, and the Early Repayment potential.
These two additional Benefits associated with the Endowment Mortgage are further extolled at two other locations within the HOME MORTGAGES explanatory pamphlet text, and they were also particularly stressed by the First National Senior Official when giving advice and explaining the Endowment Mortgage Contract.
These Benefits are also expressly stated on the First National / Irish Life Mortgage Quotations as being Benefits that are not available if the Repayment Mortgage is chosen. (The represented comparative Projected Surplus After Loan Repaid for the Repayment Mortgage is —— NIL.)
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In the Mortgage Quotation for £35,000 borrowed over 20 years @ 11.85% p.a. (i.e. Case 1 of Appendix 1/2), the Benefits relating to the Endowment Mortgage are stated as follows :
BENEFITS
Projected Surplus After Loan Repaid £12,770
Alternatively the loan could be repaid early after 18 years under the First National Home–Way Mortgage.
The second paragraph in the Notes on the Mortgage Quotation states:
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The surplus and early repayment term are calculated assuming a unit growth rate of 10.75% p.a. less a management charge of |
% per month. This rate is not a forecast and the amount payable may be greater or less than illustrated. --------------------
The clear impression given from the comparison format used in the Mortgage Quotation is that, with both the Repayment Mortgage and the Endowment Mortgage, the Loan will be Repaid at the end of the 20 year Mortgage Term.
As was the case with the format used to show the comparison of BENEFITS in the First National HOME MORTGAGES explanatory pamphlet (see above), the Mortgage Quotation column comparison format is such that the Benefits pertaining to the Endowment Mortgage are clearly indicated to be in excess of those pertaining to the Repayment Mortgage.
Also, in the case of the Endowment Mortgage, it is clearly indicated in the Notes that the Projected Surplus is CONDITIONAL on an assumed growth rate of 10.75% being achieved.
And, in the case of the Endowment Mortgage, it is clearly indicated in the Notes that the Early Repayment Term is also CONDITIONAL on an assumed growth rate of 10.75% being achieved.
But there is NO SUCH CLEAR INDICATION of the fact that, in the case of the Endowment Mortgage, the Repayment of the Loan Amount of £35,000 is ALSO CONDITIONAL on an assumed growth rate being achieved.
––––––––––––– BUT IT IS.
NOTE !
The assumed growth rate necessary to achieve Repayment of the Loan Amount over the Mortgage Term would obviously be less than that necessary to achieve Repayment of the Loan Amount together with a Surplus.
For example, in the case of the Endowment Mortgage Loan taken out by my wife and I (i.e. £40,000 borrowed over 15 years @ 11.85% p.a. –– see Appendix 1/3), while the Repayment of the Loan together with the Projected Surplus was based on an assumed net growth rate of 9.75% p.a. over the 15 year Mortgage Term, the Repayment of the Loan itself was based on a lower assumed growth rate of 7% p.a. net. As related below, this fact was communicated to me by First National / Irish Life on the 8th December 1993.
The fact that First National / Irish Life (in the case of the Endowment Mortgage Option) highlight the CONDITIONAL LINK between the assumed growth rate being achieved and both the Projected Surplus After Loan Repaid and the Early Repayment Term, while neglecting to even mention the fact that the Repayment of the Loan itself is also CONDITIONAL on an assumed growth rate being achieved, is grossly misleading to the consumer.
The consumer, by virtue of the Mortgage Quotation presentation, is led to believe that his Premium Payments towards the Endowment Mortgage will, at the very least, Repay the Loan ––––– SUCH IS NOT THE CASE.
If the growth rate achieved is not sufficient, then the Endowment Fund Value will not be sufficient to Repay the Loan.
Both First National and Irish Life KNOW this fact, but their highlighting of same might dissuade the consumer from choosing an Endowment Mortgage, and the whole purpose of their Mortgage Quotation Comparison presentation is to persuade the consumer to choose an Endowment Mortgage in preference to a Repayment Mortgage.
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The third paragraph in the Notes on the Mortgage Quotation (i.e. Case 1 of Appendix 1/2) states:
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Your Home-Way Endowment premiums are invested in the Home-Way mortgage fund. All growth achieved is immediately locked in and is guaranteed to be payable at the end of the mortgage term. In addition, there is a guaranteed minimum value at maturity of £14,560. The guaranteed minimum death benefit is £35,000. |
Again, the way this 'guaranteed minimum value at maturity' is conveyed to the customer / consumer is misleading.
By using the prefix adverb, 'In addition', to qualify 'there is a guaranteed minimum value at maturity of £14,560' , the impression is given that this is a further benefit in addition to the BENEFITS (pertaining to the Endowment Mortgage) as listed in the Quotation comparison.
Again, this is a communication of information to the customer / consumer that is contrived to blur a major defect of the Endowment Mortgage.
This major defect pertaining to the Endowment Mortgage (and benefit pertaining to the Repayment Mortgage) should have been communicated with absolute clarity.
It should have been given greatest prominence within the First National HOME MORTGAGES explanatory pamphlet (see Appendix 1/1) and within the First National / Irish Life Mortgage Quotation comparison, most particularly within the comparison of BENEFITS.
That both First National and Irish Life chose not to do so was an act of deliberate concealment.
On the matter of BENEFITS, the corollary truth to be educed from 'there is a guaranteed minimum value at maturity of £14,560' (with respect to the Mortgage Loan of £35,000) is that:
| Endowment Mortgage | IF the net unit growth rate is Zero %, THEN there will be a SHORTFALL of £20,440 on the amount required to repay your Loan at the end of the mortgage term. Irish Life guarantee that the shortfall will not exceed this figure of £20,440. |
| Repayment Mortgage |
Your Loan will be Repaid at end of the mortgage term. — There will be NO SHORTFALL. |
But, again, the communication of these truths would have run contrary to the purposive intent to deceive by those within First National and Irish Life, the intent at all times being that the customer / consumer would be both persuaded to choose the Endowment Mortgage and dissuaded from choosing the Repayment Mortgage.
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If the assumed growth rate necessary to achieve both the Repayment of the Loan and the Projected Surplus is not being achieved, the Endowment Mortgage Policyholders will find that, when they are some years into their Policies, the Life Assurance Company will write to them, notifying them that growth rates are such that Loan Repayment and the original ‘anticipated’ Surplus will not be achieved, and that it will be necessary to increase their Premium Payments into their Endowment Policies. This may happen more than once throughout the life of the Policy.
Again, there was no mention whatsoever of this onerous element of the Endowment Mortgage Option (particularly onerous relative to the Repayment Mortgage Option with which it is being compared) in any of the First National / Irish Life PRE–CONTRACT representations. It is referred to in Paragraph 19 of the Policy Provisions, Privileges and Conditions (see Document 6C of Appendix 1/6) under the euphemistic title ‘POLICY REVIEW’.
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Paragraph 19 ––––– POLICY REVIEW
At each Policy Review Date and at any time during the five years prior to the Mortgage Repayment Date as the Company’s Actuary shall decide, the Company’s Actuary will……… if the review date precedes the Mortgage Repayment Date then determine the Premium payable in the future such that the estimated benefits at the Mortgage Repayment Date, calculated on such basis as the Company’s Actuary shall decide, will be equal to the estimated benefits calculated at the Date of Commencement of the Assurance,………… and in determining the said Premium the Company’s Actuary will inter alia have regard to the Accumulated Fund on the said review date……. If on a Policy Review Date the Premium thus determined is greater than the Premium currently payable the Premium payable in future shall be increased to the amount determined.
The ‘Policy Review Date’ (defined in Paragraph 2(p) of the Policy Provisions, Privileges and Conditions) means each fifth anniversary of the Date of Commencement of the Assurance…….
Note! Remember, from our Policy Conditions DECODING of Investment (see Section 4.7), that the entirety of the amount of any Premium Increase is ‘creamed off ’ for the first year of that increase, and 4% of that Premium Increase is ‘creamed off’ in subsequent years ––––– BEFORE any Investment of that Premium Increase occurs!
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Again, it is clear that the following RISK BURDENS, KNOWN by both the First National Building Society and the Irish Life Assurance Company to be intrinsic to their Endowment Mortgage Contract, were not brought to the attention of my wife and I, and explained, at any stage PRIOR TO CONTRACT or at the TIME OF CONTRACT.
| (1) |
With the Endowment Mortgage Contract the Repayment of the Mortgage Loan itself is CONDITIONAL on an assumed growth rate being achieved. |
| (2) |
IF the assumed growth rate necessary to effect the Repayment of the Loan is not achieved THEN it will be necessary to increase the Premium Payments to Irish Life. |
By their omission to highlight these Risk Burdens associated with the Endowment Mortgage Option, First National and Irish Life were able to effectively execute the concealment of their potentially onerous effect on the consumer.
But this concealment gives effect to an even greater concealment. It conceals the fact that with the Repayment Mortgage Option NO SUCH BURDENS EXIST.
This is the greater ‘Sleight of Hand’.
By their omission to highlight the inherent defects of the Endowment Mortgage, First National and Irish Life effectively deny the greatest Quality of the Repayment Mortgage ––––– the ABSENCE OF RISK.
Note!
On the 8th December 1993, in reply to an allegation by me that the details of the Endowment Mortgage Policy as presented by them in their pre-contract quotation (this being the Endowment Mortgage Quotation to my wife and I for £40,000 borrowed over 15 years @ 11.85% p.a. –– see Appendix 1/3) were a contrived misrepresentation of the elements of the policy they purported to represent, First National forwarded me a letter enclosing a response from Irish Life Assurance which included the following statements:
‘The original quotation assumed that a growth rate at 7% net @ premium of £147.20 a month would be sufficient to repay the mortgage of £40,000 in 15 years.’
‘I am sorry that you feel that the quotation is a contrived misrepresentation of the policy. The commission Irish Life pay to the seller is a contractual agreement between us and we are not obliged to disclose the amount of same.
The quotation for your mortgage provided accurate facts based on assumed growth rates.’
Of course, as with the Case 1 Mortgage Quotation referred to above, there was NO INDICATION WHATSOEVER in the Endowment Mortgage Quotation to my wife and I (see Appendix 1/3) that the repayment of the mortgage was CONDITIONAL on an assumed growth rate being achieved or that this assumed growth rate was 7% p.a. net.