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CHAPTER 4

THE LABYRINTH

4.9.2 More ‘Sleight of Hand’
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You will recall from Section 1.2 (The Experts’ Advice and Representations) that, upon receipt of the Endowment Mortgage Quotations in May 1991, I carried out a ‘cursory check’ to see if (based on the assumed net growth rate of 9.75% p.a.) the Monthly Payments to Irish Life would repay the Mortgage Loan and yield the stated Surplus After Loan Repaid.

With the 15 Year Endowment Mortgage Quotation (this being the one my wife and I actually chose), for a Loan Amount of £40,000 borrowed over 15 years @ 11.85% p.a. (see Appendix 1/3), Monthly Payments of £147.20 to Irish Life would yield a Projected Surplus of £9,569 After the Loan of £40,000 had been Repaid –– assuming a net unit growth rate of 9.75% p.a.


The ‘cursory check’ I carried out was as shown on the following Investment Flow Table.

Year

Yearly Amount
Invested

£

Investment Period
@ 9.75% p.a.

Years

Amount at End
of Investment Period

£

1

1,600

14

5,885.50

2

1,600

13

5,362.64

3

1,600

12

4,886.23

4

1,600

11

4,452.15

5

1,600

10

4,056.63

6

1,600

9

3,696.24

7

1,600

8

3,367.88

8

1,600

7

3,068.68

9

1,600

6

2,796.06

10

1,600

5

2,547.67

11

1,600

4

2,321.34

12

1,600

3

2,115.11

13

1,600

2

1,927.21

14

1,600

1

1,756.00

15

1,600

0

1,600.00

Cumulative Amount at End of 15 Year Period

49,839.34


The ‘cursory check’ I carried out showed that, for a Yearly investment of £1,600 (i.e. £133.33 per month), the Surplus After Loan Repaid would be £9,839.94 (i.e. £49,839.94 – £40,000). The Projected Surplus After Loan Repaid figure of £9,569, as stated by First National in their Quotation, could therefore be achieved by a monthly investment of slightly less than £133.33 per month. This was more than adequately covered by the stated £147.20 Monthly Payment to Irish Life, the difference, I presumed, went to cover the Guaranteed Death Benefit.


Note!
The Amount at the End of each Investment Period is computed using the Single Payment –– Compound Interest Formula: S = P(1+i)n , the interest being compounded annually using  i = 9.75% p.a., and the payments being assessed as though end-of-year payments. (The derivation and use of this formula will be explained in Chapter 5.)


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When I received Irish Life’s letter (see Appendix 1/7) in June 1993, stating that ‘during the first year of the policy there is no investment’ and that ‘from the second year onwards there is 96% investment’, this put paid to the validity of the ‘cursory check’ I had carried out (as shown above) when I received the Endowment Mortgage Quotations in May 1991. The investment period applicable, as stated in Irish Life’s letter, was only 14 years and NOT 15 years as I had previously thought.

Taking account of this fact, it appeared to me, based on the ‘cursory check method’ I had previously adopted to see if the investments and Projected Surplus After Loan Repaid correlated with one another, that the Projected Surplus could not be achieved. I wrote to First National on the 11th February 1994 highlighting this apparent ‘anomaly’ and, again, accusing them of Misrepresentation.

It was only following persistent enquiry by a number of interested National Media personnel (whom I had contacted on the matter) that I finally, on the 18th April 1994, elicited a response from First National.

 

First National’s response was a revelation. –––––––––––– It provided a complete, month by month, breakdown of the Investment / Fund Value process (see Appendix 4/2) for the Endowment Mortgage Policy. The breakdown had been provided by Irish Life.

The breakdown clearly showed that the Final Value of the Endowment Mortgage Policy would be achieved, based on the assumed net growth rate of 9.75% p.a., i.e. the Projected Surplus After Loan Repaid of £9,569.00, as stated in the First National / Irish Life Endowment Mortgage Quotation (see Appendix 1/3), would be achieved. The figures within the breakdown also showed that the Endowment Mortgage could be repaid early after 13 years and 8 months, as stated in the Quotation.


A separate appended breakdown showed that Loan Repayment would be achieved at the end of the 15 Year Mortgage Term, based on an assumed net growth rate of 7% p.a.
This fact (as already related in Section 4.8), that Loan Repayment was CONDITIONAL on an assumed net growth rate of 7% p.a. being achieved, had never been mentioned by either First National or Irish Life prior to or at the time of contract.


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Note! Clearly, the ‘check method’ I had adopted, when (in February 1994) I confronted First National with the ‘anomaly’ in their Mortgage Quotation, was incorrect. BUT, while First National / Irish Life, in providing the Investment / Fund Value breakdown, had, ostensibly, addressed the anomaly presented to them, the contents of this breakdown appeared to raise yet many more anomalies.

Some things within the Investment / Fund Value breakdown didn’t quite fit with the information provided by First National / Irish Life pre-contract.

But, by this stage, it was also patently clear that, in order to pursue matters further,I would need to seriously address my state of ignorance; I would need to acquire a knowledge of the fundamental principles of Financial Analysis and of the precepts of Law.



 

In time, the Investment / Fund Value breakdown provided by First National / Irish Life would indeed prove to be a revelation; for its analysis, when contrasted against the original Representations made by First National / Irish Life, would ultimately expose many significant parameters that were either FOREIGN TO, or DISTORTED BY, those original Representations.

(1)

Within the First National / Irish Life Mortgage Quotations, the meaning of the term ‘% per annum’ with respect to the assumed growth rate used for the First National Home-way Endowment Mortgage Fund was at variance with the meaning of the term ‘% per annum’ with respect to the interest rate charged by First National on the Mortgage Loan.

The meaning of the term ‘% per annum’, in the context of the assumed growth rate of 10.75% per annum for the Endowment Mortgage Fund, was the Annual Percentage Rate (APR). This was not the case in the context of the interest rate of 11.85% per annum as applied to the Mortgage Loan itself. The actual Annual Percentage Rate (APR) being charged by First National on their Mortgage Loan was 12.749%.

In other words: IF the meaning of the term ‘% per annum’ in the context of the assumed growth rate was equivalently applied to the interest rate quoted for the Mortgage Loan, THEN the interest rate quoted should have been 12.749% per annum, and not 11.85% per annum.

Note! You will have a clearer understanding of the significance of the APR to an informed decision by the borrower/investor when you study later chapters (particularly Chapter 6: The Cost of Credit). For the present, it is sufficient to understand that compounding a Mortgage Interest Rate on an annual basis while charging repayments on a monthly basis is more expensive for the borrower than compounding the same Mortgage Interest Rate on a monthly basis while charging repayments on a monthly basis.

The term ‘% per annum’ therefore has TWO DIFFERENT MEANINGS within the text of ONE DOCUMENT (the First National Home - Way Mortgage Plan Quotation).

(2)

Neither the Existence of Bonus Units, nor the ABSOLUTE NECESSITY of the inclusion of Bonus Units over the last 5 years of the Endowment Policy Term in order to achieve the Projected Surplus and Loan Repayment, had ever been mentioned in any First National presentation literature or in any of the PRE–CONTRACT Representations made to me by First National / Irish Life, either those articulated by the First National advisor or those detailed in the First National / Irish Life Quotations.

Nor was it ever mentioned, in the case of the 15 Year Endowment Mortgage actually chosen by my wife and I (see Appendix 1/3), that the Early Repayment Term of 13 years and 8 months was also dependent on the ABSOLUTE NECESSITY of the inclusion of Bonus Units over the first 3 years and 8 months of the last 5 years of the Endowment Policy Term.

Nor was it ever mentioned, in the case of the 20 Year Endowment Mortgage Quotation (i.e. Case 1 of Appendix 1/2) represented to me by First National at our pre-contract meeting, that the Early Repayment Term of 18 years was dependent on the ABSOLUTE NECESSITY of the inclusion of Bonus Units over the first 3 of the last 5 years of the Endowment Policy Term.

Again, because both First National and Irish Life did not bring these facts to our attention, they effected concealment of a Major Defect of the Endowment Mortgage Contract. It is only in the latter stage of the Endowment Mortgage Contract (IF the assumed growth rate is achieved) that the Endowment Mortgage Fund Value will begin to equate to the Repayment Mortgage Loan Principal Repaid Value, for equivalent net cash outflows. This has potentially harmful consequences for the Borrower. (This highly significant fact will be explained in detail in Chapter 10.)

But, once again, the greater ‘Sleight of Hand’ is that, by omitting to bring the consumer’s attention to a major defect (the necessary DEPENDENCE ON Bonus to achieve the Projected Surplus and Loan Repayment) of their Endowment Mortgage Contract, First National / Irish Life have effected concealment of a Major Attribute of the Repayment Mortgage Contract, in that, with the Repayment Mortgage Contract, NO SUCH DEPENDENCE EXISTS.

(3)

The month by month Investment / Fund Value breakdown (see Appendix 4/2) provided by Irish Life also showed that, subsequent to the Down-Valuing of Premium Payments by Irish Life’s ‘creaming off’ process, even further charges were imposed on the policyholder. Units were deducted (surrendered) ‘for stamp duty (year 1 only), life cover and policy fee'.

Irish Life’s post contract June 1993 letter (see Appendix 1/7) had stated that ‘At the start of every month the cost of life cover for that month is calculated and a number of units are surrendered from your policy to meet that cost along with a policy fee of £2.00 per month.’

Note! This June 1993  letter had also indicated that the 100% ‘cream off ’ in the first year included stamp duty. Note B at the end of the Investment / Fund Value breakdown (see Appendix 4/2) shows that such is not the case; in addition to the 100% ‘cream off ’ in the first year, Units were surrendered from the Policy (i.e. money was charged) for stamp duty.

Following from the above, and from our previous Decoding of the Investment process, it is clear that the BENEFIT CHARGES AND POLICY CHARGES, as stated in Paragraph 13 of the policy Provisions, Privileges and Conditions (see Document 6C of Appendix 1/6), are charges in addition to the 100% ‘cream off’ of the first year’s premiums and the 4% ‘cream off’ of each subsequent year’s premiums, and are also in addition to the management charge of % per month — this being the ONLY charge mentioned prior to contract.

 

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