Endowment compensation - complex example

For mis-selling purposes you cannot realistically take into account the extra borrowings in Januaries of 1998, 2003, and 2005, unless you bought additional endowment policies to cover this extra borrowing. The policy you have was only intended to grow to £30k over the term, and you will have been expected to find other ways to repay the subsequent additional borrowing.

Indeed. The interest rate would simply equal twelve times the monthly payment divided by £30k, except where this needs ti be adjusted to take account of MIRAS, and except where the payments don't change when the rate changes, but at the next anniversary of the loan advance. The MIRAS complication should be easy to take care of, and the deferment of payment amount changes is probably safe to ignore.

I guess so.

Yes, you should. It's not easy in general, but in your case it is. Setting MIRAS aside for the moment, you know how to calculate the monthly payments on a repayment mortgage, I take it: You use the monthly interest factor f (this is 1 plus a twelfth of the annual interest rate, so if the nominal annual rate is 6%, then f=1.005).

Then, if n is the number of months in the term (300 for a 25 year term):

(monthly payment) = (amount borrowed) * (f-1) / (1 - f^-n) [formula A]

If the interest rate changes after m months, you will first need to calculate the debt remaining:

(amount left owing) = (monthly payment) * (1 - f^-x) / (f-1) [formula B]

where x is the number of months *remaining* in the term: x = n-m

You then plug this "amount left owing" into the formula A in place of "amount borrowed", and x instead of n, to calculate the new monthly payment for the new interest rate. That is to say the new payments are the same as if you were to take out a new loan, for the amount now still owing, but for a shorter than the original term, since the redemption date is presumed to remain fixed.

Just keep going with formulas A and B like this for all rate changes and finally work out the amount owing on surrender date. Subtract this from the original £30k to get the amount you have "paid off", and this is the figure to be compared to the surrender value of the endowment. You will also need to track the differences in monthly costs associated with interest-only vs repayment. You may need to scale all these by inflation to get their surrender-date-equivalent values before adding them all up.

Now to MIRAS. Since your loan was only for £30k, which happens to be the MIRAS limit, all your loan qualified for this relief, so you can do your monthly payment calculations by simply using a scaled-down interest rate. So for periods when MIRAS was 20%, then if the interest rate was 6%, use 4.8% instead (this being 80% of 6%). For larger amounts outstanding, the above simple formula cannot be used and an iterative process must be used to calculate the monthly payment.

In fact, you don't need to bother with MIRAS at all, as it comes out in the wash. This is because you can calculate your net-of-MIRAS interest rate from your interest-only payments, and use that rate in your repayment amount calculations.

There is the extra complication of your low-start years, and the question arises how this would be modelled for an "equivalent" repayment loan. It is conceivable they might assume the existence of a loan product which applied a £40 monthly discount to the normal monthly payments for the first five years. If so, then each time you apply formula A, you would subtract £40 from the answer to get your actual monthly payment (if in the first 5 years), and it is this reduced payment you should plug into formula B to get the new amount owing.

In message , "Black Hole (o)" writes

The FSA & Ombudsman lays down a set of rules for the calculation of compensation and all lenders or life offices must use it. The model software is called 'Mortgage Fundamentals' which does pretty much what Ronald describes. If it isnt told the actual interest rate you were charged then it will default to the Halifax Base rate, this is just a co-incidence that your mortgage was also with Halifax.

Be aware that the calculation will not necessarily show that you were worse off with the endowment even if there is shortfall predicted.

I am surprised it is Halifax who are doing the computation, who was the Endowment with? Standard life?

I found out about that last night. Apparently, the company who developed the software have an online version that consumers can use themselves at

I'm not seeking to profit from this experience, just to be treated fairly. If I've done as well as I should have done, then fair enough. If I've lost out big time, then I think I deserve to be compensated properly and fully. I have my suspicions which it is, but my particular circumstances appear to me, at least, to be highly non-standard, so I feel like I'm trapped in a fog bank.

The original "seller" of the (Sun Alliance) policy was someone employed by the estate agent who I bought the house off. This estate agency was bought up by Halifax (as were a number of others in the late 80's/early 90's when there seemed to be money in it for them), who then closed it a number of years later when they all started losing money when boom turned to bust. This is how I ended up at Halifax's door.

Originally, I got as far as Halifax admitting that they had bought the assets and liabilities of the estate agency, and admitting that they had then sold the shares. When I pressed them to tell me who they had sold the shares to, in the belief that the responsibility for mis-selling had passed to the new owner, I got stonewalled. Halifax said that they did not have to give me that information, and would not give me that information.

No-one seemed to be able to advise me on what I could do next, short of going to court. Which? said it wasn't a consumer matter (so I ceased my Which? Legal Service subscription in protest), and the Financial Ombudsman Service said it was outside their remit.

At this point I thought I had reached the end of the line (some 2 years ago), so imagine my surprise when I get a letter from Halifax saying they have reviewed my case and now find in my favour. I guess the FOS has kicked some a*** over the number of complaints that were just being rejected out of hand and referred back to them, as a result of which, Halifax have been forced to look again in a more favourable light.

Of course, the cynic in me might think that Halifax has chosen to pay off what it thinks will be the cheapest cases, just to get its acceptance rates up and get the FOS off its back.

They've got all the paperwork now, so time will tell. But as you can see, I've no reason to trust Halifax, which is why I want to be able to independently verify their reasoning, assumptions and calculations.

From my searches on this newsgroup over the last week or so, several of you guys talk with the authority that obviously comes from being in or related to the finance industry. You guys know who you are. I hope you don't mind me riding your coat tails a bit, and then I'll shut up and leave you alone.

Many Thanks

Firstly, let me thank you for taking the time to reply to my post. I appreciate it greatly.

This is BIG news to me. So how do I treat the regular overpayments I made on Loan 4. Do I attempt to pro-rata them between the additional borrowings and the original 30K loan in some way?

This is what I have assumed, though I have as yet made no allowance for MIRAS. Simple assumptions are OK with me as long as the end calculation is not very sensitive to small variations in the variables being assumed (ie a small change in one thing causing a large change in end result). If this is the case it would be good to know which variables ARE highly sensitive so that more effort can be devoted to getting them as accurate as possible.

I found some historical DTA tables on the FOS website which puts the premium at about GBP 6.50 per month, so I guess my guess wasn't far off.

I've set my spreadsheet (Excel 97) up using the PMT function so that each row is the first payment in a series of loans of ever decreasing term and balance. The first row is the first payment on a 300 month repayment loan on

What I definitely DON'T do, is scale anything by inflation, and NONE of the FOS examples I have ever found suggest this should be done. When you say 'track the differences in monthly costs', I assume you mean the endowment premiums paid, outstanding loan balance etc, rather than the administration or life assurance costs associated with the endowment, which are entirely hidden from me within the monthly premium.

This is what I have done in the spreadsheet I have set up.

The FOS website

Many Thanks

I would treat them as being entirely on the additional borrowings until it is paid off.

You didn't have a repayment vehicle for them, whereas you did for the original loan, so it is reasonable for you to make arrangements to pay the additional borrowings and rely on the endowment for the original loan.

In message , "Black Hole (o)" writes

Ahh, that explains it.

Ahh! I remember, was it you who posted about this a year or so ago?

Wrong answer in this context (it would be relevant in terms of tax treatment of interest in a rental business, but not here).

In fact, there is no need for him to "treat" his overpayments in any way at all, since the actual balance of his loan account is irrelevant. Compensation, AIUI, is based on the difference between the actual surrender value and the *presumed* (difference between the amount borrowed and his) loan balance on a ficticious repayment-basis loan assuming the usual repayment profile disregarding overpayments or further advances.

But he would have to pro-rate his interest payments to count only the interest paid on the original borrowing, not on the additional borrowing. This works both ways, i.e. if his overpayments reduced the outstanding balance to below the originally borrowed £30k, it should still be assumed, for the purpose of tracking his ongoing costs, that he had been paying interest on the full £30k throughout.

What I mean is the differences between your monthly outgoings between, on the one hand, your actual situation, i.e. interest on £30k at the rate in force at the time plus the endowment premiums and, on the other hand, your ficticious situation, i.e. capital and interest payments plus premiums on decreasing term life insurance.

Don't know.

That seems extremely unlikely. The reason people are happy to be sold endowment mortgages is because their monthly outgoings are lower, for the same term, size of loan, and interest rate, than they would be with a repayment mortgage plus DTA. For a "low-start" endowment the premiums are even lower in the early years than they would be for a "normal" endowment, so I'm puzzled at what's going on here, unless you simply made a mistake and wrote "more" when you meant "less".

Yes it was. Someone's got a good memory :)

The FSA handbook says that the standard approach to redress is "to put the complainant, so far as is possible, in the position he would have been in if the inappropriate advice had not been given, or the other breach (of the duty of care) had not occurred."

As far as I can see, this means assuming that I had a repayment mortgage up until the date the endowment policy was surrendered. If I had had repayment mortgages, I might still have borrowed the extra monies, amd I might still have made the extra repayments. Who knows.

So I think the right and fair approach is to look at what my loan balance is after paying in the surrender value of the policy and what I paid out in loan payments and premiums, and compare this to what my loan balance would have been and what my total outgoings would have been if the loans had all been repayment loans (with an allowance for Decreasing Term Assurance).

As this seems to be a grey area, I have asked the FSA to advise me how redress should be determined in these circumstances. I will let you know how they respond (unless you are an FSA employee, in which case you might already have supplied the answer :( )

Regards

The first endowment premium I paid was 38.35 and the first interest payment on a loan of 28,300 was 210.88 = 249.23

At this monthly interest rate (0.7452%) I calculate a 300 month repayment mortgage would have cost 236.37, plus an allowance of 6.50 for Decreasing Term Assurance, giving a total of 242.87.

So the "low start" mortgage was 6.36 a month more expensive than a repayment mortgage plus (optional) DTA.

My calculations show that this would have held true throughout practically the whole of the policy lifetime, and certainly over the first 5 years of the "low start" period.

So it wasn't "low start" in comparison with a repayment mortgage, it was "low start" in comparison to what was to come later when the premiums doubled after 5 years !

Saw me coming, didn't they?

Regards

I did another set of columns to model a repayment mortgage for the original loan amount of 28,300, using the actual monthly interest rates I incurred. Interestingly, this model shows that the loan balance of the repayment mortgage would have been 3,500 less than the endowment surrender value, but I would have paid out 17,500 less for the repayment (with an allowance for DTA) than I did for the endowment policy. So in this case my total loss would have been (17,500 - 3,500) = 14,000, which is some 5,000 better than my previous figure.

So I like your way of determining redress much more than I like mine. :-)

In message , "Black Hole (@)" writes

should the comparison be between the amount by which the repayment mortgage has reduced compared with the surrender value? or the repayment mortgage balance compared with what remains outstanding if the s/v/ was used to reduce the mortgage?

Thats a huge difference. Have you taken the interest on the endowment backed mortgage into account?

My mistake. What I should have said is that the amount paid off the repayment mortgage I modelled would have been 3,500 less than the endowment surrender.

I mistakenly counted in the overpayments to the endowment mortgage rather than just the interest. Correcting this drops the calculated loss to about

So now I don't like it quite so much anymore :-(

Regards