Help me end my festering resentment

zagfles

kingstreet wrote: »

So if the savings products had been low-charging without a fat commission would you agree the interest-only/savings plan methodology was actually pretty effective/successful against a repayment mortgage where very little of the capital is repaid in the early years?

No, it's just a different payment profile. If the savings product paid less in interest than the mortgage interest APR, the repayment mortgage is more efficient. Basic maths - but plug the numbers into a spreadsheet if you don't believe me.

There was an issue in the old days where some banks didn't give interest credit on repayments until the annual recalcuation, ie they charged interest on the outstanding amount at the start of the year for the entire year, but that would have been reflected in the APR, and anyway this is more of an issue in the later years when repayments are bigger.

When PEP/ISA savings replaced endowments at the end of the 80s shouldn't the criticisms have ended and the idea of the savings plan being topped-up at each house move surely could have continued?

Endowments were still being pushed in the late 90's, I remember being spun the type of bull above then.

The idea of PEP/ISA mortgages was that hopefully the investment would grow at a better rate than mortgage interest.

If interest rates and investment returns had continued at 80s levels would we be discussing this, or would we have repayment mortgage mis-selling to frown at instead?

No. Is there a scandal that banks offered cash savings accounts paying less interest than equity based investments were making?

Cash savings, like repayments mortgages, were safe and reliable.

Besides investment returns since the 80's were pretty good too, just not good enough to hide the rip-off charges in endowments.

BTW I don't disagree. If the plans hadn't had over-optimistic growth rates and 67% commission, they would have been pitched at a savings level which might have avoided the outcomes we've seen and some of the best and most cost-competetive mutuals would still be around.

Yes, equity (or partly equity) based investments would have worked out pretty well if it wasn't for the rip-off charges! However they always were a gamble - that wasn't always made clear.

stoutyeoman

"You could have just taken out another repayment mortgage. If the new mortgage was of the same value as your existing mortgage balance, then your repayments for a new 20 year term would have carried on exactly the same as if it had been the same mortgage. "

It was for the exact same amount of money as that's all they would lend me, but wouldn't the payments have been higher over a 20 year term than over a 25 year term? (Seems to me I don't understand mortgages any better now than I did then!)

AnotherJoe

stoutyeoman wrote: »

"You could have just taken out another repayment mortgage. If the new mortgage was of the same value as your existing mortgage balance, then your repayments for a new 20 year term would have carried on exactly the same as if it had been the same mortgage. "

It was for the exact same amount of money as that's all they would lend me, but wouldn't the payments have been higher over a 20 year term than over a 25 year term? (Seems to me I don't understand mortgages any better now than I did then!)

No because you were effectively on a 20 year term anyway with the old one.

As someone else pointed out, say you take a 25 year mortage and the payment is £500 a month. That stays constant for 25 years . So after 5 years you are now effectively on a 20 year mortage at £500 a month and you owe a little less than 5 years previously. If you took out a new 20 year mortgage for whatever you owe at that point , your repayments will be exactly the same because it's the same amount for the same length of time.

Perhaps It's a bit counterintuitive because the amount you owe goes down slowly at the start and decreases much faster towards the end, you tend to think if you paid off £2k over 5 years then over the next 20 you'd only pay off 8k but you'd pay it all off.

stoutyeoman

I think I see. thanks for the explanation. To give Abbey a huge benefit of the doubt, maybe they did try to explain the mechanics of a repayment mortgage and I just didn't grasp it. Well, I do feel rather less resentful in that I understand it was high interest rates & slumping house prices that were the real downer. All that money I paid out on my first flat was gone whatever. And although I'd have been better off sticking with my repayment mortgage, it was me who chose the Equitable Life endowment. If I'd gone with an Abbey National suggestion for an endowment - I can't remember what they were - I perhaps wouldn't have come such a cropper. Thanks very much indeed to all who replied.

zagfles

stoutyeoman wrote: »

I think I see. thanks for the explanation. To give Abbey a huge benefit of the doubt, maybe they did try to explain the mechanics of a repayment mortgage and I just didn't grasp it.

Possibly, but a lot of bank & building society staff didn't understand mortgages themselves, and there was pressure to flog endowments, just like there was to flog PPI in later years, because of the massive profits they made.

Well, I do feel rather less resentful in that I understand it was high interest rates & slumping house prices that were the real downer. All that money I paid out on my first flat was gone whatever.

Don't think of it like that - house prices went down but so what - it just means the second flat was cheaper, what you lost on the first one you gained on the second. And the second I bet went up? - so you're not worse off.

I sold my first house for less than I bought it - but this was good news not bad. Because the second house I bought was over twice the price, and that would have gone in price too. The same percentage fall on both meant what I lost on my first house was made up for twice over by what I saved on the new house. So falling prices benefitted me overall.(luckily I wasn't in negative equity).

And although I'd have been better off sticking with my repayment mortgage, it was me who chose the Equitable Life endowment. If I'd gone with an Abbey National suggestion for an endowment - I can't remember what they were - I perhaps wouldn't have come such a cropper. Thanks very much indeed to all who replied.

Perhaps not as much - but endowments were never a sensible financial product after the tax relief stopped in the mid 80's. They were only sold because there was so much commission in selling them due to the rip-off charges.

stoutyeoman

zagfles wrote: »

Don't think of it like that - house prices went down but so what - it just means the second flat was cheaper, what you lost on the first one you gained on the second. And the second I bet went up?

Oh god yes, eight times over, and you're right, I was able to just walk into a flat in a great location because no one else was buying. A 20-year suspicion of financial products may not have done me any harm either.

amateur_house

For what it's worth, I think taking a repayment mortgage was the right thing to do. That's what we did, even though there was a hard sell to take an endowment. One advisor actually said the only way that it wouldn't pay out at least what the mortgage was, plus quite a bit extra, would be if lots of banks went out of business. Well that's what happened, but endowments were performing poorly long before then.

I worked for Abbey in the early 90s and dealt with a lot of unhappy customers who had taken out fixed rate mortgages at 13-14%, and were stuck with them as interest rates fell to below 10%. So even though you weren't able to port your mortgage it sounds as though you at least weren't stuck on a high fixed rate mortgage.

stoutyeoman

Yes, it could have been worse. I was utterly suggestible at that time.

Imma_Number

25 years ago, so ~1992, was the start of your 5 year repayment mortgage, then ~1997 onto an endowment.
Below are the bonus rates for the Commercial Union With-Profits endowment I took out in 1993. I don't know how Equitable Life compare but up until 1997 the bonus amounts from CU weren't too bad, so it probably looked like a good deal. Unfortunately after that they went on a bit of a decline and haven't really recovered*

%BSA = % Basic Sum Assured
%BONUS = % of already accrued bonuses
%GROWTH = % growth of the underlying fund

%BSA    %BONUS  %GROWTH
31 Dec 1994	4.00%	6.00%
31 Dec 1995	3.50%	5.50%
31 Dec 1996	3.00%	5.50%
31 Dec 1997	3.00%	5.00%
31 Dec 1998	2.50%	4.50%     13.4%
31 Dec 1999	2.00%	4.50%     16.0%
31 Dec 2000	2.00%	4.50%    - 0.7%
31 Dec 2001	1.50%	3.50%    - 8.0%
31 Dec 2002	0.50%	1.50%    - 6.8%
31 Dec 2003	0.00%	0.50%     10.4%
31 Dec 2004	0.00%	0.50%      9.9%
31 Dec 2005	0.00%	1.50%     14.8%
31 Dec 2006	0.00%	1.50%     10.2%
31 Dec 2007	0.00%	1.50%      4.8%
31 Dec 2008	0.50%	2.00%    -13.3%

*More recently With-Profits endowments have paid crummy annual bonuses with, I hope, a higher terminal bonus.

Imma.