Recently got a compensation offer and to me it's derisory. I have 9 yeras left on a 25 year mortgage/policy and they have offerened me approx 1/3 of the mortgaged amount. In the letter they stated that this would put me in the same position had I taken out a repayment mortgage - but this is a con! I assume they try to get away with it due to the sliding scale of interest/capital repayment with a repayment mortgage.
If I had taken a repayment mortgage the loan would have been paid off in 9 years - with their offer I will have to take out another mortgage of 2/3 the original sum which wont come close to paying it off in this time assuming I make the same payments.
In the letter they company said this was their final offer and they confirmed this by phone.
Clearly I am not in the same position as I would have been had I taken out a repayment mortgage as I would have been debt free in 9 years.
When I said this to the companies rep she said I was twisting the facts!
Has anyone in similar cicumstances had any success with the financial ombudsman or the courts?
Can you be more specific? I take it you mean 1/3 of the original amount borrowed, but is this the size of the compensation, or is it compensation and surrender value added together? In fact, *are* you surrendering? It doesn't go without saying that you should.
Is it?
Ah! But you mustn't assume you'd be making the same payments as you have been making, but rather the same payments you would have been making had you opted for the repayment from the start.
If you had taken a 25 year repayment mortgage 16 years ago, you would
*by now* have paid off not much more than 1/3 (exact amount depends on the interest rate history), and you would also have spent more while doing so, because repayments cost more per month than interest-only payments.
Have you tried to find out how much your repayments for a 9-year repayment mortgage for 2/3 of the original sum would cost you per month now? And how that compares with what you would have paid per month had you gone for repayment from the outset? Check it out. The answers may surprise you. Pleasantly.
The compensation plus their surrender value makes up the 1/3 of the original amount borrowed.
Yes, I'm not sure what my best course of action is - hence the OP.
At the time "they" presented the repayment as more expensive - by around 4 p/m IIRC.
See above - don't forget the premiums for the endowment policy.
I haven't but I will, and report back here ASAP. But giving the repayment was only slightly above the cost of the endowment I assumed that 1/3 in
16/25'ths is unfair and surely must be much higher - anyway I will check.
Well, the calculation they presented was simply giving the amount I had paid up to now compared with a repayment at the same time.
Giving the proviso above that I actually don't know payments for a 9 year mortgage, it is not "my fault" that the endowment has gone t*ts up 2/3 of the way through. Further, I borrowed the money for 25 years - because the structure of a repayment mortgage does not "favour" the capital after 16 years I maintain that I am effectively penalised.
Anyway I will try and get a quote for a 9-10 year repayment and see what the difference is - but if it's more expensive (as I strongly suspect) I don't know where that leaves me.
I haven't. Don't forget the premiums for the life policy you probably would have bought had you gone for repayments. That is to say the endowment premiums pay partly for life cover (more expensive life cover than with repayments because it covers you for the full amount for the full term, whereas the other policy would cover you for decreasing values as the term wears on, on the assumpion that part of the debt would have been paid off already) and partly for your savings plan to pay off the debt. Difficult to say what the ratios are but I guess only about 2/3 of the premiums are in fact invested.
This is perhaps counterintuitive, but don't forget that with repayments the debt does not shrink linearly with time, but negative-exponentially.
That is to say that after X% of the term has elapsed you will have paid off Y% of the original debt, and for all X other than 100, Y will be less than X. In fact, X-Y is at a maximum at around the point at which there are still 11 years to go, so looking at it, as you are, with 9 years to go, you are almost at the worst-possible-looking point.
The only effective difference between the performance of an endowment mortgage and a repayment one is how the rate of return on the investment compares with the loan interest rate. If the stock market makes more money than money lending, which over the long term you would expect to be the case, then endowments are better value, but because there are no guarantees, they're a gamble. Repayments might be poorer value, but they're risk-free.
Basically the fact that the risk aspect was not properly explained to you is what makes it likely that you were mis-sold and are therefore entitled to compensation. You are not entitled to compensation merely because the endowment performed poorly.
Which was useless to me as I had more than adequate life cover at the time - which is one reason they agreed I was mis-sold.
See above.
But taking all you said into account, all the blurb states that you would be placed into the same position had you a repayment mortgage. If I had taken a repayment mortgage out at the time I would be finished in nine years paying X per month. Instead they want to place me in a position where I still have
2/3 of the mortgage outstanding and must remortgage.
Let me ask this question. How much more will I be paying overall given the switch they recommend, compared to taking out a repayment mortgage initially? Whatever excess this amount is, is the amount I should be compensated. Otherwise, clearly in my view I am not in the same position as if I had taken out a repayment mortgage from the outset.
The sliding-scale of loan-capital repayments of a repayment mortgage should be irrelevant to me. They are not designed to be cashed in after 16 years - in fact you are penalised in most cases by the mortgage company if you do so. By the life company using this comparison is grossly unfair and misleading as far as I'm concerned.
No, you misunderstand. What you present as two different positions are actually one and the same. Had you taken a 25-year repayment
16 years ago, you would by now have paid off only approximately 1/3 of the amount borrowed.
It may surprise you, but the answer is "Nothing".
Assuming (as for planning purposes you must) that actual interest rates remain constant during the whole 25 year term, then there is a simple (*) formula which you can use to calculate the monthly repayments given the size of the initial debt, the monthly interest rate, and the number of months in the term. Once the payment is fixed, and assuming the rate stays the same, then the debt reduction profile over the term is also fixed.
(*) This is not quite true because of the complication of MIRAS, long may it rot in hell, but let's not worry about that.
You can re-calculate the monthly payment at any time using the same formula and the same interest rate, but if you replace the number of months in the original term with the number of months *left to go*, and replace the original amount borrowed with the amount *still owing*, you will get exactly the same monthly payment.
That's one way of looking at it, but since in fact there is no excess, the compensation is actually based mainly on the present shortfall of how much your endowment savings fund has reached, compared with how much you would have paid off. Assuming your repayment would have paid off 1/3 of the loan, it makes sense for the sum of surrender value plus compensation top-up also to be 1/3. This should then be further adjusted (downwards) by how much you actually saved over the years by interest-only payments plus endowment premiums being cheaper than repayment-payments plus alternative life cover premiums. In your case you might argue that, as you already had life cover, there would be no additional premiums, and so their cost should not be added, and this should almost certainly result in the adjustment being upwards instead of downwards.
Where I've been talking about 1/3, this is an approximation. The exact figure depends on the exact number of years (and months) to go, and on the effective average interest rate to date. With 9 years to go, the amount you should expect to have paid off would be 1/3 if the interest rate had been about 11.5% (which I'm sure it has been for some of the time but I rather doubt it's been that high on average). At a perhaps more realistic 7%, you'd have paid off about 44%.
I'm not sure what you mean by sliding scale. Your monthly payments are fixed from the outset, and it is indeed irrelevant to you how much of this payment is interest and how much capital, but what is very much relevant to you is the debt reduction profile over time. After 25 years you'd expect to have paid off 100% of the capital, but after 16 years you'd expect to have paid off an awful lot less than 16/25 of the capital.
They may not be designed to be cashed in part-way through, but in practice they very often are, either by moving the loan to another lender or when you sell the house. This applies to repayment loans just as it does to interest-only ones, and while it's easy to know what to do with the latter, because the amount owed remains the same, it's important with the former to know how much is still owing at any time. In fact, at 7%, after 16 years, you'd still owe 56%, not as *you* might think, 36%.
What happens with an endowment is that the expected exponential rise in the fund value (which is expected to match or exceed the original amount borrowed by the time the term is up) is generally roughly equivalent to the exponential rise in amount-paid-off associated with a repayment deal. The marketing difference between the two boils down to the monthly cost. It is generally expected in the long term that market growth rates exceed interest rates, and so an endowment is expected to outperform the "safer" repayment method, hence making it possible to charge lower premiums and to put less into the savings pot, confident in a highly satisfactory outcome. Sadly, recently market performance has lagged significantly behind expectations which is why we're seeing all these shortfalls everywhere.
Surely this is wrong or I didn't make myself clear (which wouldn't be the first time ;) ) When the policy was sold to me by the mortgage company who were affilaited to the life company, they presented RM and EM has almost equal outlay - the RM was around 4p/m more - let us ignore this amount also let us ignore the ebb and flow of interest rates.
So after 25 years - taking into account the salesmans "guarantee" that the EM would pay the loan - both mortgages are paid off.
After 16 years I am 16/25ths through either mortgage. If you then say that If I maintain my current payements into a new RM for 2/3 the sum over 9 years it will pay it? It wont.
In my specific case working out the figures roughly, and ignoring *any* interest, my payements will still leave around 10-15% of the capital outstanding - add on the interest and I'm well short.
This shortfall is the amount of compensation I should receive - or they should guarantee to pay off the loan at the end of the term. Any other "solution" and I am out of pocket and not "compensated" at all in my book.
Indeed, it might be better to see the term through and hope for a pick-up as in the worst case scenario I wouldn't be *that* much worse off.
No wonder the endowment companies are happy with this arrangement and their share prices haven't suffered unduly.
Well I'm going by what the position the said I would be in if I'd had a RM its somewhere between 1/3 and 44%. I haven't got the exact figures to hand.
Yes. So it *is* relevant how much is interest and how much capital, as they are offering me an amount by comparison with a RM, that if I switch I will still owe ~2/3 of the original loan. See above. Without actually having quotes, I'm as sure as I can be that I will have to pay more money switching mid-term than if I'd had a repayment throughout. Surely, this is the amount of money I will be out of pocket.
Actually, I think the comparison with a RM is bogus. If they are guilty of mis-selling they should promise to pay any shortfall at the end-of-term. I'm sure they've hived off a tidy profit from our policies over the years.
What would happen if there was no time-limit to the claim? Everyone would claim the day before maturity - then the compensation would equal the shortfall and everyone (except the endowment company) would be happy.
Yes it will. Well, no, not your current payments, but your original would-have-been payments, but if as you say they were roughly the same, then yes. Except it depends on the interest rate.
No. Let's try some figures. Suppose you borrowed £50k, suppose the interest rate was (and stays) 7% (charged as 0.583% per month for 300 months), so your Interest-Only payments would have been £291.50 and your Repayment payments would have been £353.26.
For simplicity, let's assume that the endowment premiums (or their excess over basic term life assurance) just happen to make up the difference of £61.76 a month.
After 192 months, i.e. with 108 months to go, your loan account would stand at £28251 (you would have paid off £21749 or 43.5%). How much would the repayments be to pay off £28251 at 7% over 9 years?
You may find it hard to believe, but they'd be £353.26.
If you were being compensated in 2013, the actual shortfall (adjusted by any accumulated payments difference) should indeed be your compensation.
But you are being compensated *now*, so it makes sense for your compensation to be the *current* shortfall. That is the difference between (using the above figures) £21749 and the present value of your endowment fund.
One realistic option might be to take the compensation *only*, and nevertheless keep the endowment going, i.e. not to surrender it. But it depends on what your inclination to gambling is.
Get the quotes, then. You'll be pleasantly surprised.
Yes, they should, but only if they guaranteed to pay off the whole amount. But if you check the fine print, you'll find they didn't.
There's a fundamental difference between compensating for poor performance (which they'd have to do if they promised specific performance targets would be achieved, and in this case they would indeed have to compensate by making up the actual shortfall), and compensating for mis-selling (in which case they have to put you in the same position as if they had *not* mis-sold you, i.e. if they had sold you the repayment mortgage they should have).
The only way we can resolve this between Ronald and yourself (and with me tending to side with Ronald) is for you to give us the exact figures, i.e. how much borrowed, endowment premium, the total amount the endowment company will pay out today (being the surrender value plus compensation), the monthly amount your were paying in interest and the exact date (to the closest month) you took the mortgage and endowment.
Without this info the discussion will go on forever.
: >I've been watching this thread with interest :-) : > : >The only way we can resolve this between Ronald and yourself (and with : >me tending to side with Ronald) is for you to give us the exact : >figures, i.e. how much borrowed, endowment premium, the total amount : >the endowment company will pay out today (being the surrender value : >plus compensation), the monthly amount your were paying in interest and : >exact date (to the closest month) you took the mortgage and endowment. : > : >Without this info the discussion will go on forever. : > : >> : > : : I have been wondering if this was a troll, as he seems to be : particularly careful not to have given any figures?? :
God knows what I'm hoping to achieve by trolling! I was just trying to keep things general, that's all.
I don't have the figures to hand here. But I will get them together tonight. Tomorrow morning I will get a quote for the outstanding mortgage over 9 years (if they will do one). I will then post all the figures tomorrow afternoon.
I would like to side with Ronald too - then I'd be happy that I wasn't being ripped-off twice.
You have nine years left. I assume you are content to carry on the normal payments for the next 9 years (or do you expect the compensation to pay off the whole of the loan now?)
If the compensation offered is 1/3rd of the amount outstanding, and you carry on paying the same, you should pay off the whole of the loan (outstanding balance less 1/3rd )in 9 years time .
The compensation is only designed to put you back in the position you would have been in - not put you at an advantage.
Would be happy to show you the calcs if you let me have the figures.
What would you consider reasonable? They have offered 1/3rd of the amount outstanding. If you therefore pay off 1/3rd of the loan and maintain the same payments for the remaining term (9 years) you should more than pay off the mortgage.
If you have a problem with the figures, let me have them and I will explain.
The reason is that paying off 1/3rd will put you about some way along the curve, more of your repayments will be capital and less will be interest.
Or were you hoping for a freeby and for the compensation to pay off the whole of the loan now?
Peter Taylor
(reponse to Jack who wrote:):
Hi,
Seeking advice on the above.
Recently got a compensation offer and to me it's derisory. I have 9 yeras left on a 25 year mortgage/policy and they have offerened me approx 1/3 of the mortgaged amount. In the letter they stated that this would put me in the same position had I taken out a repayment mortgage - but this is a con! I assume they try to get away with it due to the sliding scale of interest/capital repayment with a repayment mortgage.
If I had taken a repayment mortgage the loan would have been paid off in 9 years - with their offer I will have to take out another mortgage of 2/3 the original sum which wont come close to paying it off in this time assuming I make the same payments.
In the letter they company said this was their final offer and they confirmed this by phone.
Clearly I am not in the same position as I would have been had I taken out a repayment mortgage as I would have been debt free in 9 years.
When I said this to the companies rep she said I was twisting the facts!
Has anyone in similar cicumstances had any success with the financial ombudsman or the courts?
I have done some very slight rounding - so as not to give exact figures for confidentiality.
Loss calculation
1.Capital repaid(RM) 17,900
2.Surrender value 13,000
1-2 4,900
Outgoings
3.EM 62,920
4.RM 64,840
3-4 (1,920)
They state it is their policy not to include (3-4) in the calculation, therefore the amount payable is 17,900.
My mortgage was for 45,100 taken out in sept 88. My EP is 57.40 p/m.
The issue may be slightly complicated by (I don't know) the fact in the last couple of years I have taken advantage of a couple of discounts in the interest rates from the lender, so I am not currently paying the SVR, but lets ignore this.
Anyway, whats the SVR now? 6.59%
This would make my premium around 250.00 on 45,100 I think, giving an outlay of 307.40. After compensation the oustanding capital is
45,100-17,900',200.
Looking on Alliance and Leicesters site the nearest quote (to the SVR) I got on the above loan over 9 years was
So on SVR I'm not sure how much extra I must pay, but I have the figures for
5.79% so I will work on that basis.
5.79% on my original loan gives an outlay of approx 218.00+57.40'5.40
Now, remember they state that the compensation should place me in the same position as if I had taken out a repayment at the outset. Using A&L a 25 year RM is
Internet Feesaver 5 Yr Fixed Rate 31.08.09 Monthly Repayment: 288.16Interest Rate: 5.79% Incentives: Free valuation (refunded on completion), 300 cashback, 10% Overpayments
(Which as I said in an earlier post is very similar to the total outlay for the RM when I tok out the mortgage).
So to place me in the same position I should have to pay a maximum of
288.16 for the remaining years and preferably 275.40.
So by switching to a repayment I am 330.21-275.40T.81 worse of per month = 54.81*12*9=5,920 over the full 9 year term.
If I had taken a repayment out at the outset I would only have paid (on A&L's figures) 288.16275.40.76*12*16$49.92 more than with my endowment - even if you include this - which I don't think you should(see below- and from their statement above they don't include it) - I am still
5,920-2449.93 = 3,470 worse off!
Remember, they say the compensation should place me in the same position
*NOW* as if I had had a repayment from the outset. So to repeat, using current figures I should have to pay 288.16 for the remaining 9 years - the level of compensation should be at a level to reduce the capital to require this payment.
So there you have it - I don't think I've made any mistakes (in the arithmetic) - but I'm ready to be shot down in flames in any case ;o)
Ah! But what we really need is the calculation of (1). How did they arrive at their reckoning that £17,900 would have been paid off had you gone for RM? Do you accept or challenge this figure?
Is (3) just the interest payments or does it include the endowment premiums?
How generous of them.
OK, £27200 at 6.59% over 9 years gives £334.55 per month.
I make it £323.74, but never mind.
I make it £284.82.
No. That is not what's meant by placing you in the same position. What it means is that if you had been on RM from the start, then there is a certain figure which emerges from the fancy calculation, which gives you a result along the lines of (1) above, i.e. how much would you have paid off. If you would have paid off £17900, then that's what you should get to put you in the same position.
In fact it is likely that the effective average interest rate over those 16 years was rather more than the 5.79% you're working with. Indeed, had it been 5.79%, you would have paid off £21170. Had it been 6.59%, you'd have paid off £20135. To have paid off £17900, the interest rate would have had to average about 8.71%. If you cannot challenge that, then you cannot disagree that your account balance at this point would be £27200, and that to be put in the same position, that amount is what they should help you reduce your debt to.
Consider also that, had your initial interest rate been 8.71%, your monthly payments would have been a whopping £369.56.
The only way you can argue for more is to argue that £17900 is *less* than you would have paid off. The on ly way you can do that is to dig out your actual interest rate history for the entire 16 years.
Thanks for your comments. My point is I disagree that their idea of "placing you in the same position" is corrrect. I see it to be what I suggest, that is the same outgoings from now to the end of term.
I repeat my OP, has any one had *any* success on this front?
But had you taken out a repayment, you wouldnt be paying the same outgoings as an endowment would you? You'd be paying more. If you want to be in the same position as if you took out a repayment you cant reasonably complain if they then put you in that position!
That front would be the 'have your cake and eat it' front I take it?
I think Jack perceives a "Loss of bargain" issue here. The salesman punted his Endowment Policy and said "this will be better for you". The endowment has gone T.U. but Jack is being offered only indemnity, no compensation for the loss of the illusory benefit of the Endowment Policy, (which, after all, is a function of the quality of the management of the fund) which the insurance company offered to get the business, sold, and Jack has paid for, for over 15 years.
In that sense the Insurance company have "Had their premiums and eaten them" ;-)
If it was any other (Non-financial) product, erm... Timber, say, and the dealer said "You don't want to buy Repayment fence panels, I can offer you bigger Endowment fence panels, by the time you get to the end of building your fence, you'll have a few hundred feet of timber over for yourself, maybe enough to build a Sauna", and then it turned out he'd been speculating on the futures market in timber and couldn't even deliver enough to finish the fence, proper compensation would require him to make good on what he'd actually promised to get the business not just finish the fence. 'Cause that's what he sold.
Same with Pensions. In 1987 my pension salesman said my pension would be "Telephone Numbers" . It will not be, it will be "Microscope Numbers" :(
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.