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CHAPTER 9

THE FINANCIAL ANALYSIS OF CASE 2
EXPOSING FRAUD

9.4Case 2: Financial Chicanery
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From the above Case 2 Mortgage Analyses it can be seen that, for an Amount Borrowed of £40,000 over 20 years at 11.85 % p.a. :

(a)

investment in the Endowment Mortgage yields an Internal Rate of Return of 14.39 % p.a. with an Equivalent Monthly Cost of £341.23 ——  this, CONDITIONAL on the assumed growth rate being achieved.

(b)

investment in the Repayment Mortgage yields an Internal Rate of Return of 14.435 % p.a. with an Equivalent Monthly Cost of £326.70.



With the Endowment Mortgage we are investing in a Risk Investment. We are given no indicative measure of the Associated Risk pertaining to investment in the Endowment Mortgage —— but we know that such an Associated Risk exists, and justification of investment in the Endowment Mortgage would therefore require a substantial Risk Premium differential in excess of the Certainty Return.


The Certainty Return investment option, with Mortgage Investment, is a Repayment Mortgage.


Note!
With a Risk Investment, the absence of any indicative measure of Associated Risk, of itself, constitutes an additional risk factor superimposed on that Associated Risk —— it augments the Risk.


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In Case 2 our Certainty Return is 14.435 % p.a. (i.e. the Repayment Mortgage IRR). Taking account of the substantial Risk Premium differential above this return of 14.435 % p.a. necessary to justify investment in the Endowment Mortgage, ADVICE, by anyone with knowledge of the rudiments of financial analysis, to invest in the Endowment Mortgage (with an Internal Rate of Return of 14.39 % p.a. CONDITIONAL on an assumed growth rate being achieved) would be an act of ABSOLUTE  RECKLESSNESS.



The Endowment Mortgage IRR of 14.39 % p.a. (which is CONDITIONAL on the assumed growth rate being achieved) falls far short of what would be required to deliver an acceptable Risk Premium differential in excess of the IRR of 14.435 % p.a. provided by the Repayment Mortgage, and the Equivalent Annual Cost of the Endowment Mortgage at £4,094.78 (£341.23 per month) is also in excess of the Equivalent Annual Cost of the Repayment Mortgage at £3,920.45  (£326.70 per month).


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So how then were Irish Life / First National able to formulate a mode of comparative presentation of Endowment Mortgage versus Repayment Mortgage that, on the basis of an objective analytical presentation of the Mortgage data, would show the Repayment Mortgage in a less favourable light than the Endowment Mortgage and yet would appear to be a mathematically truthful presentation ?



Again,

they were able to do so by applying their Expertise

————————  TO  DECEIVE.



They were able to do so by employing an artifice of Financial Chicanery, the use of such artifices of financial chicanery being endemic to the entire Mortgage Selling Market.
(I have yet to see a whole-truth presentation of a comparison between an Endowment Mortgage and a Repayment Mortgage by any Financial Institution.)



 

You will note from the Case 2 Quotation that the Total Net Monthly Outlay for the Repayment Mortgage is stated as £346.71. But, as we have seen from our Analysis of the Case 2 Repayment Mortgage, this figure should be £326.70 per month, i.e., the Equivalent Monthly Cost of the Repayment Mortgage in Case 2 is £326.70.


How then, using what appears to be an objective analysis of the Mortgage data, did Irish Life / First National arrive at the inflated Net Monthly Cost figure of £346.71 for the Repayment Mortgage?



The answer is that the Irish Life / First National Quotation presentation is NOT a truthful objective analysis of the Mortgage data —— it is a DECEPTION, wherein they have contrived to make the Repayment Mortgage appear more costly than it actually is.



How did they do this?


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You will note, from the Case 2 Mortgage Quotation, the statement:

‘The repayment method mortgage interest relief varies from £138.67 in the first month to £19.48 in the last. An average is used’.



Referring to Analysis Table 5, Column F: we see that the Tax Relief on Interest for the first year was £1664, giving an interest relief of £138.67 per month in the first year —— we also see that the Tax Relief on Interest for the last year was £233.80, giving an interest relief of £19.48 per month in the last year. The summation of the Tax Relief on Interest for the entire 20 year Mortgage period is £26,028.49 (see Column F of Analysis Table 5), giving the average of £108.45 per month (i.e. £26,028.49, divided by 20 years, divided by 12 months) as presented in the Irish Life / First National Quotation.



BUT £108.45 per month is merely an Arithmetic Average.




The Arithmetic Average has NO MEANING WHATSOEVER in the context of Financial Analysis.



THE   ‘ARITHMETIC AVERAGE’ TAKES NO ACCOUNT

OF THE   ‘TIME VALUE OF MONEY’.




For a TRUTHFUL Financial Analysis presentation, it is the Weighted Average that should be used.




For a refresh on the invalidity of the Arithmetic Average and the necessity of computing the Weighted Average when doing Financial Analysis, refer to Example 5.7 in Section 5.3.





This DECEPTION of using the Arithmetic Average for comparison of the Endowment Mortgage against the Repayment Mortgage is further augmented by using yet another merely arithmetic calculation comparison, the Total Net Outlay Over Term.

 

The Total Net Outlay Over Term comparison is merely a multiple factor of 240 times (20 years x 12 months) the Net Monthly Outlay comparison, i.e., for the Endowment Mortgage £81,896 = £341.23 x 240 and for the Repayment Mortgage £83,211 = £346.71 x 240.


The UNTRUTH
of the £346.71 Net Monthly Outlay figure represented for the Repayment Mortgage is therefore increased by a multiple factor of 240.




A further DECEPTION (apart from the incorrect comparison computation) inherent in the use of the purely arithmetic representation of the Total Net Outlay Over Term comparison figures is that such a representation (coupled with any supportive verbal endorsements of same by the ‘expert’ advisor of the Lending Institution) imparts, to the representee, a COMPLETELY WARPED understanding of the relative value of the Projected Surplus After Loan Repaid.


In the mind of the representee, the Projected Surplus After Loan Repaid figure of £14,643 is given favourable significance relative to the Total Net Outlay Over Term figures of £81,896 for the Endowment Mortgage and £83,211 for the Repayment Mortgage.


Again, such a representation of relative values has no standing whatsoever in Financial Analysis. The £14,643 Projected Surplus is an End of 20 Year Term figure, while the Total Net Outlay figures are purely arithmetic calculations.


The relative insignificance of the value of the £14,643 Projected Surplus figure is truly seen when compared to the Final Value of the Loan Amount (this also being an End of 20 Year Term figure), i.e. £14,643 compared to £375,646.86
(the Final Value figure being based on the 11.85 % loan interest rate over 20 years) ———————— again, a truly expert Deception.

 

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