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Mortgage points

Julian Stevens usually makes a lot of sense but his letter (Money Marketing, August 15) seems to be way off beam but highlights more serious side issues.

First, the position should be neutral if one compares capital and interest and interest-only, using his payment strategy where daily interest is charged on a variable rate.

The advantage with annual interest using his system would be an increasing overpayment balance in interest only, because lenders generally treat capital overpayments during the year as just that and make an interest and capital adjustment on the accumulated over-payment at the end of their year, which roughly equates to the capital and interest effect in the same period.

Now to the serious issues. When interest rates rise, interest-only borrowers must increase payments immediately. However, in the past, lenders have allowed capital and interest borrowers to continue paying at their old rate or at a new rate below market rate to “alleviate hardship”.

I prefer to amend the term to “dangerous option” because it created more problems than it solved. For example, life and protection cover became out of sync and mortgage terms were extended on an increasing balance due to payments made being below interest due.

The “dreaded” low-cost endowment holders griped about their increased payments when interest rose but were more than grateful for the finite date for repayment of all or most (if there was a shortfall)of their mortgage when the position was explained to them.

All this started before Fimbra, the PIA or the FSA appeared and they have done nothing to highlight the potential problems since. That goes for the MCCB as well.

I see nothing of this dreadful past reality when comparisons are made these days by experts. Neither have I seen anyone come out and say that, in the case of a low-cost endowment mortgage with waiver of premium added,the capital element of the mortgage is protected from three or six months onwards in the event of long-term sickness or disability (clearly, there is still the investment risk).

In the case of a capital and interest mortgage, the protection is for the life plus waiver of premiums which (except on death) contains no capital element. I suppose one could then use the argument of an additional PHI policy to cover mortgage payments at extra cost. But this is fraught with danger by way of eligibility for cover at time of inception or claim, affordability and inertia.

David Humble

Ilford, Essex

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