Calculating Endowment compensation 13 May 2004 at 1:34PM in Mortgages & endowments 10 replies 3K views

P2TKL

I have had an Endowment Mortgage since 1987 and the Financial Ombudsman Service have ruled that the Endowment Policy was mis-sold. The Halifax have written to me asking how I want them to calculate whether I have incurred any financial loss. There are two optionsfor me to consider:
1. To use customer specific interest rates. I have changed lenders twice throughout the last 17 years and obtained rates better than the Standard Variable Rate.
2. To use the Halifax generic rates throughout the 17 year period. These interest rates will be higher than those I actually paid.
The Halifax say that I must choose one of the options as a basis for the calculation - I cannot choose both.
Which option is more likely to produce the higher level of compensation?

BULLNOTBEAR

They do the calculation based on how you would be now if you had used a Capital & Repayment Mortgage instead of Interest Only(Endowment linked mortgage)

The redress will be the difference between your endowment value and where you would have been using a CAP rep mortgage.

The worse the rate you had the more interest you would have paid and less capital would have been repaid. That would mean that you would be better off with the Halifax SVR as you would be in a better position(less owed) if you had used your rates for capital & repayment.

Using the Halifax SVR would make it a larger difference between where you could have been and the balance of your endowment.

I think I am correct but I am ready to be corrected. I hope you understand -I'm totally confused!!!

STEP in Payless/ Mortgage Man- I tried!!!

System

I am an Independent Financial Adviser for my sins. Prefer Fees as still get paid but hey.

Endowment misselling compensation, You should be able to get the Halifax to do both, basically they are asking you which compensation you want but not providing figures. You want the most, they want the least.

As to which rate is best if you chose fixed rates then when interest rates fell you paid over the odds so without knowing exactly what rates you were on, the balance you were on when you got there etc. no hope of guessing so get them to provide both figures, they are only asking so that you can save them the cost of both calculations.

They also take into account the surrender value of your endowment, you havent said if with profits or unitlinked, if it is with profits you are on a winner as generally the surrender value is currently a lot lower than its guaranteed value at maturity, due to the market underperforming over the last few years.

Also as part of the calculation they will assume that you would have been on repayment with an appropriate life assurance policy, and deduct the premiums from that.

Whichever ever route that you choose. they can also take into consideration the fact that when interest rates fell as they have done that the difference in saving by being on pure interest only instead of repayment could have been used to reduce borrowing over the term so will include a figure for that, whether they deduct it from the compensation figure or not.

now for the legal bit the information i am giving may differ as a result of face to face conversation and is based on the limited information available, any action you take as a result of this posting is entirely your choice.


ps. first time visit to this site if anybody reading this would like to hear more from me please post and say so or email any comments. and I will allocate time per week to be online to answer your questions.

Hanoijane

Very interesting Kelster.
I'm sure you would be made welcome here.

P2TKL

Thank you BullnotBear and Kelster.
I understand BullnotBear until he (or she) says that I would be better off with the Halifax as the chosen option. Surely the option that would have paid off more of the mortgage would be be the one that would produce the greater compensation - this option would be the customer specific interest rates (lower than Halifax) and not the Halifax, wouldn't it?
Confusing.
P2TKL

System

The compensation is based on the difference between what you cauld have paid off and where you are now.

Now the higher the rates the less you would have paid off. best way to think of it is credit card balance transfers, transfer your balance from barclays (incidentally I hate barclays) to say egg you would still have relatively the same monthly payment but because they are charging you less interest more of your money is paying off what you owe.

So going back to mortgages the higher the rate the less you would have paid off hence having the highest rate used to calculate compensation gives the most money.

Problem being you were shrewd enough to choose deals which at the time were better than Halifaxes SVR. However if you had chosen a fixed rate 0.5% lower than halifax svr then if interest rates had fallen halifax svr would be lower than your fixed so compensation for that fixed period would be better than the svr, but if you chose a fixed rate and rates went up the halifax svr would produce a better compensation figure.

So you can see why halifax only want to go for the cost of one calculation.

I hope this helps

payless

Whilst may be slightly more complex due to MIRAS

not actually done these figures before, so bear with ( and I apologise if incorrect- its early ) and a bit of rounding done in this  example
( no liability held for any mistakes)

for example on a £100K mtg, 25 repayment  daily interest
at 10 yrs into mtg

at 5%
would have paid £585x12x10= £70200 in repayments
but £26078 repaid from capital

at 6%
would have paid £644x12x10 =  £77280  in repayments but £23652 repaid from capital.


kelster stated

So going back to mortgages the higher the rate the less you would have paid off

so my figures agree with this 1st bit-

BUT

hence having the highest rate used to calculate compensation gives the most money.

not sure you mean that , as that would contradict the fist statement and  my figures- surely if comparing calculations it would be better to show that on a repayment mtg you would have repaid more- and hence increase the difference ( and potential compo) between the policy surrender value and the calculated  projected amount repaid on the imaginary repay mtg.

So from above , in this example  better to use lower rate to show you would have repaid more by £2428
.
Now comes the other issue - depends on whether the compo figures take into account monthly savings.

Lets suggest a £130pm endowment policy, or imaginary £10 life policy on repay

at 5% you would have paid £417 int plus £130 policy = £547 compared with £585 +£10 = £ 595  repayment

at 6% you would have paid £500 +£130 = £630
against £644 + £10 = £654

so at the lower rates it could be said you save £48pm
(x120m   £5760 over the 10 yrs  by taking a endowment

at higher rate it would be £24pm   (x120 ) = £2880.

So if this saving is deducted from compo ( not always - BullNotBear may expand on why some do, and some don't)

The effect could be reduce compo (if insurer does this)  by a higher amount at 5% , than at 6%, the difference in favour of the higher rate calculation by £2880, which is a little more than the difference in the projected capital repayments - cancelling it out the benefit of using the lower rate, and a bit more.

So it appears better to use lower rates- especially  if you know they aren't going to deduct any monthly saving, ( or if there is none) , otherwise  higher rates may just come out best ( IMHO think I would risk it and go with lower rates, as the monthly saving is not always taken into account,- why- or may be less of an issue with your particular interest rates)


payless

( no liability held for any mistakes/ mis information for postings on this board , as it does not represent formal advice)

flyer

I have a slight problem with all this and wonder if anyone could advise. I took out an endowment mortgage with Halifax (as strongly recommended by them) in 1983 for £15700. Last year it paid out £15400 and I didn't see much point in going to a lot of trouble to recover £300. However, I took out a further policy in 1987 for £18000 and I have been advised there will be a considerable shortfall on this. I have made a complaint to the Halifax about the second shortfall and they have (surprise surprise) rejected it. Their rationale is that the advise given in 87 as consistent with the advise given in 83. Surely that's not an acceptable response?

payless

is that the advise given in 87 as consistent with the advise given in 83. Surely that's not an acceptable response?

sounds strange as if consistent- then surely rejection is not consistent with the fact that they paid on first case.


Of course pre 1988 cases have less clout anyway

flyer

I think it's strange so I'm taking it to the Ombudsman

TrickyTrotter_2

I've just received my compensation for my mis-sold endowment. A modest 3 figure sum after 18 years using HBOS variable rate throughout rather than my specific mortgage history (most of it was at Halifax's SVR anyway). Halifax chose not to not to take into account that my endowment mortgae had cost less than the equivalent repayment mortgage and haven't insisted that I sell the policy.

They have also said they will pay the cost of me making my existing Nationwide mortgage into a full repayment. It's currently 50%/50% endowment/repayment. Not sure how much this would cost anyway.