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CHAPTER 10

THE GRAVY TRAIN

10.2The Reason Why
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In previous Chapters we have exposed the Gross Misrepresentation of Facts prevalent in the First National / Irish Life Mortgage Quotation presentations; we have also exposed the many Risks of financial harm to which the borrower is subjected. The actual situation, for the borrower opting for an Endowment Mortgage in preference to a Repayment Mortgage, is EVEN WORSE STILL.


Consider the Financial Analysis of Case 1 (Chapter 8) where, in Section 8.5, we compared an 18 Year Repayment Mortgage with the 18 Year Early Encashment of a 20 Year Endowment Mortgage. (Remember the Early Repayment Term was one of the extolled virtues of the Endowment Mortgage!)

Our Analysis showed that:

(1)

By choosing an 18 Year Repayment Mortgage our loan of £35,000 borrowed @ 11.85% p.a. would be repaid in 18 Years, WITH CERTAINTY, for a Net Outlay of £344.83 per month. — This corresponds to an Internal Rate of Return of 13.276% p.a. on our Investment, with NO RISK WHATSOEVER.

(2)

By choosing a 20 Year Endowment Mortgage our loan of £35,000 borrowed @ 11.85% p.a. would be repaid in 18 Years, IF THE ASSUMED NET GROWTH RATE OF 9.75% p.a. IS ACHIEVED, for a Net Outlay of £345.10 per month. — This corresponds to an Internal Rate of Return (CONDITIONAL on the Assumed Growth Rate being achieved) of 13.268% p.a. on our Investment, and is SUBJECT TO UNDEFINED RISK.


But it is a Statistical Fact, KNOWN to the Irish Life Assurance Company, that the majority of Endowment Mortgage Policies contracted with them, will NEVER reach this stage. From our logical deductions, in Section 10.1 above, we have statistically deduced that 70% of 20 Year Endowment Mortgage Policies will not make it to year 15.


Let us now analyse the financial implications of this Fact.




For the Case 1 Mortgage Quotation (see Appendix 1/2)) for £35,000 borrowed over 20 Years @ 11.85% p.a., a Comparison of the Loan Principal Outstanding at the End of Each Year is tabulated in Analysis Table 7 below. (Analysis Table 7 is also reproduced in Appendix 10/1.) The tabulation shows the Loan Principal Outstanding at the End of Each Year, for an 18 Year Repayment Mortgage, and for a 20 Year Endowment Mortgage encashed after 18 Years.


This tabulation is done as follows:

For the 18 Year Repayment Mortgage, the Principal Repaid Each Year is tabulated in Column A (this data is already available from Column D of Analysis Table 3; see Appendix 8/1).

The Cumulative Principal Repaid is then tabulated in Column B, and from this, the amount of the Loan Principal Outstanding at the End of Each Year is calculated and tabulated in Column C.

For the 18 Year Early Encashment of the 20 Year Endowment Mortgage, the Endowment Fund Value at the End of Each Year is tabulated in Column E, and from this, the Loan Principal Outstanding if the Policy is encashed (assuming of course that no early-encashment penalties are applied) is calculated and tabulated in Column D.


Note!
The Endowment Fund Value at the End of Each Year is transcribed from the Breakdown of ‘Monthly Premiums versus Cumulative Fund Value’, as provided to me by the Irish Life Assurance Company on the 30th June 1999 (see Appendix 10/2).



NOW, let us underline in bold the figures for the End of Year 15. 


(Remember, we have statistically deduced that 70% of 20 Year Endowment Mortgage Policies will not make it to the End of Year 15 !)


NOW, compare the Loan Principals Outstanding !


May 1991 Case 1  Comparison of Loan Outstanding Analysis Table 7

 

18 Year Repayment Mortgage

£35,000 — Borrowed @ 11.85% p.a. and
Repaid over 18 Years

18 Year Early Encashment
of a 20 Year Endowment
Mortgage

£35,000 — Borrowed @
11.85% p.a. and Repaid by the
encashment after 18 Years, of
a 20 Year Endowment
Mortgage

 

Column A

Column B

Column C

Column D

Column E

End Year

Principal Repaid Each Year

Cumulative Principal Repaid

Loan Principal Outstanding

Loan Principal Outstanding
(if Policy Encashed)

Endowment Fund Value

1

637.42

637.42

34,362.58

35,060

Minus 60

2

712.95

1,350.37

33,649.63

34,245

755

3

797.44

2,147.81

32,852.19

33,353

1,647

4

891.94

3,039.75

31,960.25

32,380

2,620

5

997.63

4,037.38

30,962.62

31,317

3,683

6

1,115.85

5,153.23

29,846.77

30,159

4,841

7

1,248.08

6,401.31

28,598.69

28,896

6,104

8

1,395.97

7,797.28

27,202.72

27,510

7,490

9

1,561.40

9,358.68

25,641.32

25,998

9,002

10

1,746.42

11,105.10

23,894.90

24,343

10,657

11

1,953.37

13,058.47

21,941.53

22,534

12,466

12

2,184.85

15,243.32

19,756.68

20,555

14,445

13

2,443.75

17,687.07

17,312.93

18,385

16,615

14

2,733.34

20,420.41

14,579.59

16,004

18,996

15

3,057.24

23,477.65

11,522.35

13,316

21,684

16

3,419.52

26,897.17

8,102.83

9,445

25,555

17

3,824.74

30,721.91

4,278.09

4,999

30,001

18

4,277.97

34,999.88

Zero

Zero

35,139

Note !  Endowment Fund Value is based on an Assumed Growth Rate of 9.75% p.a. (Net)


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The Loan Principal Outstanding with the 18 Year Repayment Mortgage is £11,522.35, this, for a Net Outlay of £344.83 per month, with NO RISK WHATSOEVER.


The Loan Principal Outstanding with the 20 Year Endowment Mortgage encashed after 18 Years is £13,316, this, for a Net Outlay of £345.10 per month, ASSUMING a net growth rate of 9.75% p.a., and with UNDEFINED RISK.


This is a marked difference (£1,793.65), when one considers the UNDEFINED RISK associated with the Endowment Mortgage AND the many Deceptions we have already exposed.


It clearly provides considerable UNEARNED PROFIT for the Life Assurance Company.


It also exposes the borrower / investor to yet another Risk of financial harm. It is highly significant information relevant to the Borrower’s decision as to choice of Mortgage Type. ——— After all, the Statistical Facts relate to the Borrower, and empirically define yet another Risk he must accept when he chooses the Endowment Mortgage.


Irish Life Assurance KNOW ——— it is ‘an empirical fact’ within their knowledge ——— that at least 70% of borrower's / policyholder’s who invest in a 20 Year Endowment Mortgage with them will NEVER be paid any BONUS.


Note!
A comparison between the Repayment Mortgage Cumulative Principal Repaid and the Endowment Fund Value, for ANY year over the 18 Year period, clearly exposes an inherent Defect of the Endowment Mortgage relative to the Repayment Mortgage. Remember the Endowment Fund Value is already based on an ASSUMED growth rate and also carries UNDEFINED RISK!

 

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