1.2 The Experts' Advice and Representations
- Details
- Parent Category: CHAPTER 1
- Category: GUILTY OF BEING NAIVE
In early May 1991, I had a meeting, as arranged, with a First National Building Society Senior Official at their local Branch Office. The following is my clear recollection of what transpired at that meeting.
I gave the Senior Official a letter from my employer stating that my annual income was £20,000; this letter also ratified the permanent status of my employment.
The First National Senior Official presented to me a one-page document that set out the details of a First National Mortgage Quotation prepared for some other couple (both non-smokers), stating that the details presented would be similar for my wife and I. This Quotation was for a Mortgage Loan Amount of £35,000 borrowed over 20 years at 11.85% p.a. and was similar to the Mortgage Quotation set out below.
Note! I was not given, nor did I ask for, a copy of the abovementioned Mortgage Quotation at the time of this meeting. It was not until October 1998 (after relentless effort on my part, and after the intervention of the then Insurance Ombudsman) that I finally managed to elicit a similar Quotation from Irish Life. The Mortgage Quotation data as shown above was provided to me by Irish Life Assurance (for whom the First National Building Society were a Tied Agent) on the 8th October 1998 and has been ratified by Irish Life as being that relevant to my wife and I in May 1991 (see Case 1 of Appendix 1/2).
The First National Senior Official first explained that with a Repayment Mortgage you pay back part of your loan and the interest, each month, and that in the early years the repayments would consist almost entirely of interest. He said that First National insisted on loan applicants taking out Joint Life Cover with a Repayment Mortgage, and that with First National this would be arranged through Irish Life.
The First National Senior Official then explained how an Endowment Mortgage worked, by referring to the figures in the Quotation Example.
He said that the Gross Monthly Payments to First National went solely to pay off the interest on the loan. He said that the Gross Monthly Payments to Irish Life were invested in an Endowment Policy with Irish Life. He explained that with this Endowment Mortgage all growth achieved is ‘locked in’; the Senior Official clenched his fist as he said this.
He stated that, based on the assumed growth rate of 10.75% per annum, the Endowment Mortgage policy would repay the loan at the end of the 20 years and that I would also receive the Projected Surplus of £12,770 or, alternatively, the loan could be repaid in the earlier period shown.
The First National Senior Official then asked which type of Mortgage I wanted to choose. I said that First National were the ones with the experience and expertise with regard to Mortgages and that the main purpose of my meeting with them was to receive their advice on the choice of Mortgage.
The First National Senior Official then said:
'Mr. O’Meara, my advice to you is to choose an Endowment Mortgage. You can see yourself from the figures that, for almost the same Net Monthly Outlay, the Endowment Mortgage also offers the prospect of the substantial surplus of £12,770 after the loan is repaid. Or, alternatively, the loan could be repaid two years earlier than with the Repayment Mortgage.'
He also said that with my salary I would be paying income tax at a Higher Rate of 52% and that 'this would make the Endowment Mortgage even more attractive' to me.
Note! An in-depth Financial Analysis of Mortgage Quotations using two income tax rates (i.e., a Standard Rate of 29% and a Higher Rate of 52%) will be done in later Chapters. (See Case 2 of Appendix 1/2 for details of a 52% tax rate Mortgage Quotation.)
I asked the First National Senior Official: ‘Who decides on the assumed growth rate and is it a rate that can be reasonably expected to be achieved ?’
He replied: ‘The growth rate figures were provided by the Irish Life Assurance Company and they would not be using a growth rate that could not be reasonably expected to be achieved.’
I asked him if I would be able to switch back to a Repayment Mortgage if I was unhappy with the growth rate being achieved with the Endowment Mortgage.
He replied that this would be ‘no problem’.
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On the basis of the Quotation figures presented to me, and, more particularly, on the basis of the First National Senior Official’s advice citing these figures, I opted for an Endowment Mortgage. I was undecided as to the loan period, so the Senior Official said he would forward me details for loan periods of 15, 20 and 25 years, and that I could decide later which to take.
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I subsequently received a letter from the First National Senior Official outlining the outstanding Mortgage Application data required and enclosing the Endowment Mortgage Quotations. I had some basic knowledge of investment formulae so I did a ‘quick check’ to see if the Investments and the Projected Surplus After Loan Repaid correlated with one another.
The 15 Year Endowment Mortgage Quotation (this is the one my wife and I actually chose) was for a Loan Amount of £40,000 borrowed over 15 years at 11.85% p.a. (see Appendix 1/3). It showed that, for Monthly Payments to Irish Life of £147.20 over the 15 year Loan Period, a Projected Surplus of £9,569 would be achieved After the Loan of £40,000 was Repaid ––––– assuming a net unit growth rate of 9.75% p.a.
The ‘cursory check’ I carried out showed that for a Yearly Amount Invested of £1,600 (£133.33 per month), assuming a net unit growth rate of 9.75% p.a., the Amount at the End of the 15 Year Investment Period would be £49,839.34. There would therefore be a Surplus After Loan Repaid of £9,839.34 (£49,839.34 – £40,000).
This was reasonably compatible with the Quotation data as presented by First National –––– the Monthly Repayment of £147.20 more than adequately covered the investment necessary to achieve Loan Repayment and the Projected Surplus; the excess, I presumed, would go to cover the Guaranteed Death Benefit.
Note! A more complete demonstration of this ‘cursory check’ will be presented in Chapter 4.
Some days later my wife and I duly forwarded the completed Proposal Form (see Appendix 1/4) and any outstanding Mortgage application data to First National.