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Then somebody had the bright idea of 'low cost' endowments. Here you relied on a lower guaranteed sum assured plus bonuses being enough to pay off the mortgage at maturity. The higher the bonus rate assumed the lower the monthly premium but the greater the risk of there not being enough to pay off the mortgage.
Things seemed to have changed in mid-1980s My first with-profits endowment in 1982 guaranteed 50% of the loan; I topped it up in 1987 but the new policy only guaranteed 33%. The first policy produced more than enough to pay off the loan, the second didn't.
Not that it mattered - the surplus on the first more than covered the shortfall on the second, which was a massive £3000.
I started out with a Low Cost Endowment in 1972, (it was for about £6.5k but the payments were based on a £4.4k endowment ploughing profit in the the early low risk years to make up the difference). When it matured in 2013, some four homes later, the total profit was £38k.
You also know your getting older when you stepson thinks 4% for a mortgage is a lot. In 1988-89 I watched them rise from 8% to 16% !.
I must say 4% is worryingly low and people are so much more exposed these days as we could only borrow 3 or 3.5 times salary back then - now its 5 times ?..
Multipliers these days are generally 4-4.5x, but sometimes as high as 6x for higher earners/specific jobs.
I'm not old enough to remember mortgage rates of 16% (though I recall the rates in the late 80s/early 90s from what was on the TV) - but the multipliers in 1980 or so were often about 2-2.3x. The burden on mortgage holders (in terms of percentage income consumed by mortgage repayments) is equivalent to those in the 80s at surprisingly small modern interest rates because of the increased multiplier - 5% is more than enough to push the burden beyond that of an 80s homeowner, but, homeowners do have some protection in the form of fixed-rate mortgage agreements, which basically didn't exist back then. TBH I've given up trying to explain this debt lever to our parents on both sides - it was always worse at 16%...
I'm lucky that our remaining term is getting fairly small now, so an increased interest rate at renewal wouldn't affect us so badly, but I have no idea how our kids will ever afford to move out...
Then somebody had the bright idea of 'low cost' endowments. Here you relied on a lower guaranteed sum assured plus bonuses being enough to pay off the mortgage at maturity. The higher the bonus rate assumed the lower the monthly premium but the greater the risk of there not being enough to pay off the mortgage.
Unfortunately, competitive pressures, less than scrupulous salespeople, lower than expected bonuses and poor understanding by customers often led to the situation you found yourself in. The industry did eventually regulate itself and stop making over optimistic assumptions but the damage was done.
I had a 1980s low cost endowment. I never trusted that it would pay off the mortgage. It was a means to reduce costs in the short term. I had an alternate plan to pay off the mortgage, career progression and inflation. I paid off the mortgage early. I then called the endowment company to say they could stop sending thick annual warning packs. They said that was not possible.
You also know your getting older when you stepson thinks 4% for a mortgage is a lot. In 1988-89 I watched them rise from 8% to 16% !.
I must say 4% is worryingly low and people are so much more exposed these days as we could only borrow 3 or 3.5 times salary back then - now its 5 times ?..
The fixation on just the mortgage rate percentages and nothing else is just a recipe for pointless inter-generational conflict (not you personally, as you're at least thinking about borrowing multipliers). But there's much more to it. Take home pay, duration of each rate, long-term pay off etc
People don't get to cry about 16% mortgages if you didn't lose your house but rather managed to keep it without /too/ much difficulty, then also benefitted massively from the long, lower-rate era and huge house-price increases that followed
Another fallacy, although the Mail & Express seem to like it.
The only ones to benefit from house price inflation were the few choosing to move out of hotspots such as London, or those present at the reading of the will.
As house prices rise, so does the differential for an upgrade to a bigger property. It also means that children and grandchildren can’t get on the property ladder and often need loans or remortgaging to assist them.
Finally and crucially, property went from being somewhere to live to being an investment, inviting the unwanted attention of dodgy ‘investors’ and landlords greedily monetising our need for somewhere to live.
I started out with a Low Cost Endowment in 1972, (it was for about £6.5k but the payments were based on a £4.4k endowment ploughing profit in the the early low risk years to make up the difference). When it matured in 2013, some four homes later, the total profit was £38k.
In my case, it was a low cost endowment for 25 years starting in 1973. £6500 borrowed, endowment plan for £3497, expected maturity value £7500. When we moved three years later the total borrowed increased to £11,500 and we took out a full endowment policy to cover the extra £5000, for 22 years ending at the same time as the first policy. For further borrowing at subsequent moves we used normal repayment mortgages. When the endowment policies matured in 1998 their combined value was over £50,000. That left a debt of about £20,000, which we paid off in the next 19 months by continuing our monthly payments at the previous level.
Endowment policies worked very well for us, and our only problem was after I was made redundant in 1991 and two Allied Dunbar agents offered us an alternative scheme which, had we taken it, would probably have increased our debt and left us still owing much more when we got to 1998.
Or the surplus on downsizing to a smaller one, of course. Something I suspect more people would do if it wasn't for stamp duty and the assumption that prices would always rise.
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I'm tempted to say you know you're getting old when you own your home outright.
I do suggest you re-read my sentence, and don't quote me out of context. Hint: "People don't get to cry ... if you". i.e. those who benefitted, don't get to cry. I can explain further if needed?
(edit: and your comment is basically: "it's a fallacy but also it's not". We are in agreement then..)
Also, an LTV reduction meant lower mortgage rates for almost everyone.
p.s. I never read neither the Mail nor the Express
In my case, it was a low cost endowment for 25 years starting in 1973. £6500 borrowed, endowment plan for £3497, expected maturity value £7500. When we moved three years later the total borrowed increased to £11,500 and we took out a full endowment policy to cover the extra £5000, for 22 years ending at the same time as the first policy. For further borrowing at subsequent moves we used normal repayment mortgages. When the endowment policies matured in 1998 their combined value was over £50,000. That left a debt of about £20,000, which we paid off in the next 19 months by continuing our monthly payments at the previous level.
Endowment policies worked very well for us, and our only problem was after I was made redundant in 1991 and two Allied Dunbar agents offered us an alternative scheme which, had we taken it, would probably have increased our debt and left us still owing much more when we got to 1998.
In my case, the following three moves meant that additional top ups were necessary, each having their own endowment policy. As my income improved and the financial load of children reduced and disappeared, I found that each interest increase was just about affordable*, however, when it decreased, I maintained the payments at the higher level. This had the effect of reducing the capital and shortening the time to completion. The mortgagor had a limit whereby I either had to slow payments down or pay off the loan completely. This was in 2006, and I felt that the turbulence in the banking industry was approaching a crunch so I elected to do the latter and not have any mortgage at all. 18 months later the interest shot up to 6% and then fell to less than 1%.
I can say that the relief of no mortgage was greater than the prospect of a very small interest payment in those turbulent times.
Occasionally, I am asked to sing at sheltered housing events and I remembered all the words in the verses of the song that also features in old-time dancing....Peggy O'Neil.
Do any of my age group on this website remember that song?
I think I'm right in saying that there was a tax advantage in having an endowment mortgage rather than a repayment one.
In an endowment mortgage only the interest is paid, but in a repayment one there's a split between capital reduction and interest payment.
In those days, there was tax relief on the interest payments (up to, I think I recall, a mortgage of £30,000). It follows that the amount of tax relief (ie, number of £s) on a repayment mortgage would fall as the capital owing (on which interest is charged) reduced. In an endowment mortgage, however, the tax relief did not fall but remained constant, because the amount owed similarly remained so.
The calculation was that the extra saving of tax with an endowment would be greater than the extra cost of the mortgage + endowment.
I'm pretty sure that the reason endowment mortgages disappeared was because tax relief on mortgage was taken away, tilting the balance against them.
I must say 4% is worryingly low and people are so much more exposed these days as we could only borrow 3 or 3.5 times salary back then - now its 5 times ?..
Firstly, as interest rates reduce, the amount you can borrow for a given monthly payment reduces.
My first mortage was 3x my then salary with an interest rate north of 6%.
My current mortgage is 5 x my then salary when I took it at 0.9%.
Normalising the monthly payments (toequivalence per £100k borrowed), I’d have been paying £770 a month under the first mortgage, and £380 for the current mortgage.
I worked in the life assurance industry in the 1980s, in a relatively junior technical role rather than sales or management I hasten to add.
Originally, endowments were 'non-profit' which guaranteed to pay the sum assured at maturity or on earlier death. Perfect for paying off your interest-only mortgage. Alternatively there were 'with-profit' endowments which were more expensive but on top of the guaranteed sum paid a share of the company's profits ('bonuses').
Then somebody had the bright idea of 'low cost' endowments. Here you relied on a lower guaranteed sum assured plus bonuses being enough to pay off the mortgage at maturity. The higher the bonus rate assumed the lower the monthly premium but the greater the risk of there not being enough to pay off the mortgage.
Unfortunately, competitive pressures, less than scrupulous salespeople, lower than expected bonuses and poor understanding by customers often led to the situation you found yourself in. The industry did eventually regulate itself and stop making over optimistic assumptions but the damage was done.
Thanks for that. I can add that I found out that the first years premiums (or more) went to the kind person who sold you the endowment as commission. So getting out early on would gain you no refund.....
As I have got older one thing I have learnt is that any new idea has not yet passed the test of time and should be treated with utter contempt.
Regulations were tightened on endowment selling (too late for me as later in 1988) BUT the market then evolves something new and un-regulated.
Thatr is getting older for you - CYNICAL and proud of it.
Glad I’m not the only one (and I haven’t even reached that figure yet). Strangely enough, it seems to be an aberration limited to Sunday mornings, when I’m not in a hurry and am treating myself to “real” coffee.
I had a 1980s low cost endowment. I never trusted that it would pay off the mortgage. It was a means to reduce costs in the short term. I had an alternate plan to pay off the mortgage, career progression and inflation. I paid off the mortgage early. I then called the endowment company to say they could stop sending thick annual warning packs. They said that was not possible.
Yes I got fed up with the warning packs and was getting them even after I cleared my mortgage because the endowment was not worth getting out of prematurely.
Another fallacy, although the Mail & Express seem to like it.
The only ones to benefit from house price inflation were the few choosing to move out of hotspots such as London, or those present at the reading of the will.
As house prices rise, so does the differential for an upgrade to a bigger property. It also means that children and grandchildren can’t get on the property ladder and often need loans or remortgaging to assist them.
Finally and crucially, property went from being somewhere to live to being an investment, inviting the unwanted attention of dodgy ‘investors’ and landlords greedily monetising our need for somewhere to live.
That is how I saw it. Only ever any use if you are investing in spare properties OR when/if you down size. You still need a roof over your head but I suppose moving somewhere cheap like Thailand gets better !.
Or the surplus on downsizing to a smaller one, of course. Something I suspect more people would do if it wasn't for stamp duty and the assumption that prices would always rise.
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I'm tempted to say you know you're getting old when you own your home outright.
I think I'm right in saying that there was a tax advantage in having an endowment mortgage rather than a repayment one.
In an endowment mortgage only the interest is paid, but in a repayment one there's a split between capital reduction and interest payment.
In those days, there was tax relief on the interest payments (up to, I think I recall, a mortgage of £30,000). It follows that the amount of tax relief (ie, number of £s) on a repayment mortgage would fall as the capital owing (on which interest is charged) reduced. In an endowment mortgage, however, the tax relief did not fall but remained constant, because the amount owed similarly remained so.
The calculation was that the extra saving of tax with an endowment would be greater than the extra cost of the mortgage + endowment.
I'm pretty sure that the reason endowment mortgages disappeared was because tax relief on mortgage was taken away, tilting the balance against them.
Your recalling MIRAS - Mortgage Interest Relief At Source.
Basically the payments on £30,000 of the loan were tax free in the sense that the government paid the tax back to the lender. So if the £30,000 was at 10% per anum then if you paid £3,000 the government gave back the tax you would have paid on £3,000 worth of earnings. So you did not pay £3,000 but paid £2,400 and the government paid £600 - that assuming the tax rate was 20% (I have lost track of what the tax rate was in the 80s.
In 1988 MIRAS was changed from £30,000 per PERSON to £30,000 on the property. A married couple counted as £30,000 but an unmarried couple was £30,000 each (which tbh was unfair on people who chose to get married). The then chancellor announced the change in about March 1988 and it was to take affect on sales agrred after about September 1988. I am falryly sure on the months but not 100%. The effect was to drive demand and prices up as unmarried couples etc trampled over everyone else to get an offer accepted in time. Houses like mine went from £64k up to £100k, and I had predicted the rise. BUT what I did not predict was the collapse in demand post September 1988 making houses like mine worth about £56k !. Then the interest rises went from 8% to 16%.
I have never trusted politicians with the countries finances ever since.....
Is that a sign of my age.
Firstly, as interest rates reduce, the amount you can borrow for a given monthly payment reduces.
My first mortage was 3x my then salary with an interest rate north of 6%.
My current mortgage is 5 x my then salary when I took it at 0.9%.
Normalising the monthly payments (toequivalence per £100k borrowed), I’d have been paying £770 a month under the first mortgage, and £380 for the current mortgage.
Thanks for that. I can add that I found out that the first years premiums (or more) went to the kind person who sold you the endowment as commission. So getting out early on would gain you no refund.....
I've heard it reported on the radio that the Government is now paying > 6% on new 30-year bonds. If it's true, that's a fair bit higher than the Truss period. I don't understand why mortgage rates seem, to me, to remain below gilt rates (some mortgagees relying on very low rates fixed in the past, but I don't think that ever covers the complete period of the mortgage).
I started something off with endowment life insurance, tax relief and mortgages! I now realise I'm even older than I thought as I can't recall in exactly which decade what happened or where I was living and working at the times of all the financial changes and exactly how I was aware of a variety of events.
I recall my 1960s arranged endowment policies were forecast to receive quite substantial bonuses and those potential surrender values kept going up very nicely. Nevertheless my mortgage lender only allowed the capital sum assured to count as part of my repayments. It seems that about the time I stopped asking for those ever increasing surrender values the life assurance companies started cutting their bonuses. New policies were "low cost endowment" policies with pay outs only guaranteed up to the capital sum assured. Window dressing!
Along the way I encountered a number of dubious practices. I crossed paths with army sergeants selling life insurance policies to newly recruited soldiers. I heard of door to door salesmen twisting council tenants' arms to buy their houses with low cost endowment policies on which they made nice commissions. I met young graduates recruited by similar life insurance companies. They did very well for 6-15 months maximum until they'd sold to all their mates. By that time they'd started experiencing buyers remorse as they realised much better policies were available elsewhere so cancelled these. The sales people than experienced commission clawback for those early cancelled policies and maybe negative income!
And the worst bit may have been Equitable Life, the world's oldest mutual insurer going back well over 200 years that didn't pay commission. It was where accountants, lawyers and bank managers put their pension savings and life assurance funds. Gold plated was anything provided by Equitable Life, or so it was thought. They tried to compete on bonuses and followed many of the less reputable names into oblivion in 2000.
Different times. Different battles, different ways to be parted from your money by slick salespeople, most of whom were convinced they were doing a good job at the time.
And the worst bit may have been Equitable Life, the world's oldest mutual insurer going back well over 200 years that didn't pay commission. It was where accountants, lawyers and bank managers put their pension savings and life assurance funds. Gold plated was anything provided by Equitable Life, or so it was thought. They tried to compete on bonuses and followed many of the less reputable names into oblivion in 2000.
Basically, they promised guaranteed returns to some policyholders and these became unsustainable as the investment returns needed were not achieved. As a mutual company owned by it's policyholders there were no shareholders to turn to to make up the shortfall. Not surprisingly nobody wanted to buy or merge with it.
Equitable closed to new business in 2000 and there was lots of wrangling over which policyholders should take the hit. Lots of people lost lots of money.
Understanding the word "equitable" means treating everyone fairly and in the same way, did that company live up to its name near their trading end period?
Understanding the word "equitable" means treating everyone fairly and in the same way, did that company live up to its name near their trading end period?
The dispute ended up in the House of Lords (then the highest court) and Wikipedia sums it up thus
Equitable Life almost collapsed after the case, because it was unable to meet its additional liability to GAR policyholders, and had to sell assets and close to new business. It triggered an explosion of litigation and bitter recrimination among policyholders, directors, auditors, regulators and the government.
The irony is that out of all my various company pension funds ( which I really should consolidate ) is that the one which used to be Equitable Life is the one now consistently performing well.
The irony is that out of all my various company pension funds ( which I really should consolidate ) is that the one which used to be Equitable Life is the one now consistently performing well.
That's a point often overlooked as we progress through the evolution of railways and working practices generally.
I started work in Newcastle where 'the Ministry' (DHSS ,MPNI, whatever) was a big employer. Friends went into teaching or banking, all with good pension schemes for life. The NCB was another as was British Railways. Gradually jobs for life have all but disappeared. There's now an assumption of job changes, different employers, different pension arrangements and varying performances.
My brother had the misfortune to include a period working for the Mirror Group where Robert Maxwell managed to loot the pension funds. Chastened by that he chose Equitable Life! I havent dared discuss pensions in more recent years.
The people who bought from Equitable Life werre able to fight their case very strongly after it came to grief. Good to hear the funds may now be doing OK.
I started work in Newcastle where 'the Ministry' (DHSS ,MPNI, whatever) was a big employer. Friends went into teaching or banking, all with good pension schemes for life. The NCB was another as was British Railways. Gradually jobs for life have all but disappeared. There's now an assumption of job changes, different employers, different pension arrangements and varying performances.
Many private sector employers had 'defined benefit' pension schemes back in the day where the employees contributed an agreed amount to the pension fund and received a pre-determined pension and the employer paid whatever the actuaries calculated was needed to keep the funds solvent and able to meet it's future liabilities. The assurance company i worked for administered them for companies who didn't want to do it themselves.
Various changes including abolishing tax credits on dividends (Gordon Brown), not allowing them to accumulate surpluses in good years to see them through bad ones (Nigel Lawson) and the decline of jobs for life as you noted has made these unviable for almost all private sector employers. They only offer 'defined contribution' pensions where contributions are invested and you get whatever they happen to be worth when you retire.
There's a danger of accumulating lots of little pension pots from different jobs each with a monthly charge eroding it's value and ending up with little to show for your years of contributions. I must try to get my godson who seems to move jobs every year or two to do something about that.
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