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Fortunes and rates can fluctuate

Thanks, Money Marketing for letting me outline my views on endowment

mortgages in more depth. The letters page can only allow a good knockabout

on complex subjects and I trust that David Playfair and Peter Knight will

accept that my comments are nothing personal – like the politics you get at

Prime Minister&#39s question time compared with the real work of Parliament.

The validity of a view dep^_ends on who gives it and as David asked: “Who

is Derek Forbes?” Here is a quick sketch. I have spent 29 years in

financial services during which time I have held the positions of head of

advertising for a unit-linked office in the “early days”, salesman (Million

Dollar Round Table), branch manager (direct sales), assistant head of

direct sales, agency development manager direct sales – made redundant

1990. Director of the LIA and national chairman of the Managers&#39 Forum. I

am now
running my own marketing
consultancy specialising in

will-writing and prepaid funerals.

My stance regarding endowment mortgages is, and always has been, that you

cannot predict results over the long term. However, if the client is not

concerned about significant variations in monthly outlay, then an endowment

may well be a good idea. It is simple to understand and needs no hands-on

management. It is a do and forget it package. The only attention it needs

are possible house moves and in some unfortunate cases severe underfunding.

If, however, the cli^_ent is concerned about monthly outgoings – and

certainly young first-time buyers are, then wild fluctuations in interest

rates on a month-by-month basis make the method inappropriate.

Interest rates are a double-edged weapon against the endowment mortgagor.

We saw wild variations in the 1970s. On a 50,000 loan at 6 per cent you pay

250 a month, at 15 per cent you pay 625 a month or compound the additional

interest.

On the other hand, lower rates mean lower outgoings but eventually give a

reduced payout at maturity. We seem to be in an era of low interest rates.

Whether this is reality or an artificial political agenda to get us into

the euro remains to be seen but it is going to reduce individually funded

pensions, increase funding requirements for defined-benefit pensions and,

of course, reduce with-profits endowment bonuses
in the long term.

Some life offices were honest enough to mention this on their

illustrations but to what extent did individual intermediaries make it

clear, I wonder?

The product is sound but the
market was severely flawed. Life

com^_panies bought estate agencies in the housing boom – why?

It was simply to access a huge and highly vulnerable market for

endowments. I remember arranging a mortgage for a client who then received

a letter from the building society asking when the man from the XYZ
life

office could come round
to “arrange the endowment”.

Of course, it cannot happen now with strict regulations on best advice –

just when life offices are getting out of the endowment – well I never.

So, in conclusion, illustrated figures cannot justify the situation, as

they are only guesswork. If you are relaxed about budgets then have an

endowment by all means but intermediaries must point out the pitfalls.

Having said that, I remember a terrific illustration by an old friend

David Greenberg, showing a 25-year repayment mortgage with an investment

plan running alongside.

The investment cancelled the mortgage after 15 years. The client then paid

the same monthly outgoings – after all, he was used to it by now – and

invested in a personal pension. The result after the 25 years was

spectacular.

Trouble is it would probably now be subject to a misselling review and

declared unfit by some old Victor Meldrew like me.

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