endowment mis-selling compensation calculation

Assuming the mortgage would be for 25 years (lets say) in either case, then you wouldnt have paid off more capital than if it was discounted, because your payments would be less for discounted, and this equals less interest and also less capital than the repayment.You must end up paying the same capital repayments otherwise the terms would be different. The discount is for less interest, and its the interest part only that is being compensated for by the endowment. In the case of endowment or repayment, you still have exactly the same amount of capital to repay,.. With a discounted rate, the endowment sum needed to repay should be less, so I agree with Sun Life that you'd be worse off.

"Mark" wrote

Let's think about this, using a 100K mortgage with interest rates of 0% and

At 0% :-

Under the endowment mortgage, you'd have paid 0 interest plus the endowment premium = total 100pm. Under a repayment mortgage, paying the 100pm would reduce the balance by

At 12% :-

Under the endowment mortgage, you'd have paid 1,000pm interest plus the endowment premium = total 1,100pm. Under a repayment mortgage, paying the 1,100pm would reduce the balance by

Summary:

Under an "equivalent" repayment mortgage at 0% interest, exactly 100 would be paid off the mortgage each month. Under an "equivalent" repayment mortgage at 12% interest, *more than* 100 would be paid off the mortgage each month (after the first month).

Conclusion:

So, if you had had a repayment mortgage, you would have paid off more capital each month with a standard variable rate than with a discounted rate.

That's because they don't understand it well enough (if at all) to be able to explain it. Their experts told them what to say, so that's what they say. On this occasion, they're right.

Take the money and run. Don't let them recalculate.

Tim's explanation was a pretty good attempt to bring it down to a Noddy level. Another way of looking at it is that a mortgage loan account is exactly like a savings account except that you have a negative balance for the life of the account, and a positive interest rate means that you pay them interest, not the other way round, and when you pay in more than the interest owed, this increases the account balance just as it would in a savings account. But increasing a negative balance means the debt gets smaller.

Yet there is compounding here just as there would be with savings, by virtue of the fact that by paying in more, you will be charged less interest in the future. This is equivalent to a growing savings balance paying you more interest in the future.

Instead of thinking of the debt account balance as starting at a high value which decays downwards, slowly at first (with a gentle slope) and more quickly (with a steeper slope) later, turn the graph upside-down. Work from a negative starting balance, and then the account balance curve will look more recognisably similar to a positive exponential which you'd expect to see in a real savings account, albeit displaced downwards by the initial loan amount.

Simplified, you can think of running a repayment mortgage account as equivalent to running two separate accounts at the same interest rate, one being an interest-only constant-balance loan account, on which you pay the interest, and the other a savings account, into which you pay the excess of the repayment payments over the interest-only payments. The balance in the savings account will grow until, in the fullness of time, it reaches a positive balance matching the negative balance in the loan account, at which point both accounts vanish into a puff of smoke and your mortgage is redeemed.

Hence your "savings" (in terms of the amount you can consider having been paid off the original debt) grow faster the higher the loan interest rate is.

This may seem counter-intuitive because you'd think that lowering the interest rate means more of your (presumed constant) monthly payments can go towards reducing the balance if less is needed towards interest. Unfortunately this view is flawed because the payments don't stay constant. What stays constant is the loan term length, to match that of the endowment policy. If you reduce the interest rate but keep the term fixed, then the monthly payments go down, you pay less interest but also less towards reducing the debt.

In message , Tumbleweed writes

No. The graph of the reducing balance is a straight line for 0% and a very rounded one indeed for higher rates. The rate of decay of the outstanding balance is lower, the higher the rate of interest paid.

In message , Tim writes

No. That is the exact opposite of what really happens.

At ALL points during the life of a repayment mortgage a loan with a HIGHER rate of interest will have a larger capital amount outstanding (all other factors being equal)

That's absolutely correct, of course, provided you pay the amounts you should, as determined by the usual repayment calculation formula, given amount, rate, frequency, and term.

But when comparing repayment against endowment, you need to compare on the one hand the sum of interest-only and endowment premiums with on the other hand the hybrid repayments. This should be suitably adjusted as necessary by either deducting the cost of life insurance on one side or adding it on the other.

Basically, you need to keep a running total (which preferably also takes part in the discounted cashflow, i.e. is subject to compound interest) of the difference between what the two methods actually cost you month to month, and then offset the total paid off at the key moment by whatever that running total stands at at the same moment.

One way of doing this is, instead of assuming a standard repayment scheme loan, to postulate an open-ended scheme, rather like interest-only with optional overpayments, taking the option to make constant overpayments equal to what would have been the endowment premiums less insurance element.

If you do it like that, then the higher rate will have you pay the debt down faster.

This is because, as you know, the excess of standard formula repayments over interest-only payments is smaller at higher interest rates, which is after all the reason you'd normally pay down more slowly at higher rates. But in our scenario we would pay the same excess at all rates, not less at the higher rate.

"john boyle" wrote

OK, but would you compare this directly with an endowment mortgage costing

Surely, this would not compensate the person (having been misold an endowment mortgage) adequately? - You will have put them back into the same position they would have been in (with a repayment mortgage), but only if they had paid out 450 less than they actually did!! :-(

"john boyle" wrote

Would you also compare this one directly with an endowment mortgage costing

"john boyle" wrote

Agreed, but that's irrelevant in the context of the post, isn't it?

In message , Tim writes

Its relevant in the context of the thread. The OP said he pays off more capital with a discounted mortgage than SVR, and the follow up posts said not. I am saying he is right.

"john boyle" wrote

I think you're confusing the issue.

When considering the situation for endowment mortgage misselling, shouldn't they determine the level of mortgage remaining under the repayment alternative ***using (at least) the payments actually made under the endowment mortgage*** ?

In message , Tim writes

Which is why I didnt say it.

Yes. In theory it should take every thing into account.

I was merely challenging this statement "So, if you had had a repayment mortgage, you would have paid off more capital each month with a standard variable rate than with a discounted rate."

In message , Mark writes

The outstanding balance on a repayment mortgage decreases more slowly, the higher the interest rate.

BUT if you compare the C&I interest payments over a given period with the interest on an Interest Only mortgage you will have paid more interest on the IO overall. eg

For IO the figures would be £108000 of interest plus £100k still outstanding, making a total cash outflow of £208000, or £108000 PLUS the total of your endowment premiums and LESS the current value of the endowment (and possibly also less the cost of Decreasing Term Assurance).

The difference between the two is £4332.

If the interest rate was only 6% (say) then the total cash outlay for C&I would be £149459, and for IO £154000, i.e. a difference of £4541 which is a BIGGER difference.

So, whilst your remark " if I had had >a repayment mortgage, I would have paid off more capital each month >than with a standard variable rate" is correct, your deduction "Therefore the compensation >due to bring me back to the position I would have been in if I had not >been mis-sold, would be greater." is not.

"john boyle" wrote

That statement is true in the context in which it was written!

If he had had a repayment mortgage, and paid "interest on initial loan + endowment premium" to that, then he most certainly *would* have paid off more capital by paying "SVR + endt.premium" when rate was SVR, than paying "discounted-rate + endt.premium" when rate was discounted.

This is because 'SVR x Initial loan' exceeds the interest required (being 'SVR x current balance') by *more* than 'discounted-rate x Initial loan' exceeds 'discounted-rate x current balance'.