Halifax PEP mortgage

Sunday_Morning

Eleven years ago I took out a PEP (as it was back then) mortgage with the Halifax to run for 25 years. Last month, with 14 years remaining they sent me an "amber warning" to the effect that, on current projections, I would end up with a shortfall equivalent to 10% of the amount due.

This is obviously a blow as, not only was this supposed to generate enough capital to cover my mortgage, but also to provide a nice little nest egg at the end of the term as well.

Now I know that there was always an element of risk involved, though I didn't opt for the "higher risk" investment scheme they were offering at the time, but one that was supposed to produce a less spectacular but more reliable return.

What I can't understand is this. At that time they were talking about a 6% pa return on the income which was at the lower end of actual expectations, but would still be sufficient to both cover the mortgage and provide a nest egg. But, despite what we are regularly informed to have been a decade of unprecedented sustained growth under this goverment, it's obvious that there was a significant shortfall in achieing that target.

Now the outlook for the future is nowhere near as rosy as it has apparently been for the last ten years. Yet the "safe side" projection of where my investment is currently estimated to be heading is based on a return of 7.5% pa!!!!!!!!

How does this work? They are anticipating return on funds now which is bigger than the projection that they have failed to match up to in the last eleven years when the country was enjoying a record period of sustained growth!!!!!!!!

Is this typical of PEP mortgages that were taken out at the time, or is it just that Halifax are particularly crap?

dunstonh

Last month, with 14 years remaining they sent me an "amber warning" to the effect that, on current projections, I would end up with a shortfall equivalent to 10% of the amount due.

That is no surprise. Even if its on track at that stage you would expect an amber.

This is obviously a blow as, not only was this supposed to generate enough capital to cover my mortgage, but also to provide a nice little nest egg at the end of the term as well.

And it still might.

What I can't understand is this. At that time they were talking about a 6% pa return on the income which was at the lower end of actual expectations, but would still be sufficient to both cover the mortgage and provide a nest egg. But, despite what we are regularly informed to have been a decade of unprecedented sustained growth under this goverment, it's obvious that there was a significant shortfall in achieing that target.

There hasn't been a decade of unprecedented growth. 7 years ago we had one of the largest stockmarket declines in living history. 2007 was a generally poor year as well. The FTSE100 is 900 points or so off the high point.

The areas of high growth have been at the higher end of the risk scale and you have said that you arent in there.

Is this typical of PEP mortgages that were taken out at the time, or is it just that Halifax are particularly crap?

Its not typical of PEP/ISA mortgages but is typical of banks. Halifax probably have you in a basic FTSE tracker or balanced managed fund. Neither of these is really ideally suited for what you are doing.

You can resolve this by transferring the PEP and ISAs to a fund supermarket and get a better spread of investments offering better potential. you can do this yourself or you can get an IFA to do it for you.

The concept of PEP/ISA mortgages is fine. I have one myself as well as a number of clients. All are in significant surplus positions. That is because they are not invest and forget in a naff area but managed and that should happen with all investments whether they are linked to mortgages, pensions or just general investing.

Bank products are low quality in general sold to a mass market that knows no better. For all that trail commission Halifax has been getting, how many times has an adviser seen you to recommend portfolio rebalancing, switching etc? None. Because halifax cannot do that. So, you need to either do it yourself or get an IFA to do it.

Conrad

I agree Dunstohn. Have you seen the current advertising by Nat West outlining thier so called 'advisers'!! Laughable - I bet not one of them would have the faintest notion of comparing long term investment vehicle outcomes. Public will fall for it though. I'm also minded of thier 'another way' marketing hook. I put this 'other way' to the test with a low ltv mortgage application and the outcomes were very poor. I actually quoted thier ads to thier staff by asking what this other way actually meant. Stunned silence - they were'nt even aware of the ads - classic.

OP - these things are long term, I personally would'nt be concerned and always remember the 'best days' for investors buying monthly units are always the days when prices fall.

Sunday_Morning

What you say makes a hell of a lot of sense. If only I had the hindsight and had been savvy enough to get involved with what I was doing rather than trusting what I assumed to be "experts" with it.

I've fixed up an appointment with the bank for next week when I'll be looking to go through all the facts and figures with them. I've a suspicion that overall, I would have been better off in they had stuck my money in an interest bearing account!

What I still don't understand however, given they fall under the authority of the FSA, is how they can get away with making "reasonable" projections based of a growth of 7.5% pa (which is what provides the shortfall figure they quote), when they appear to have failed so miserably to live up to their previous "reasonable" projection of 6.5%!!!

dunstonh

The FSA sets the projection rates not the Halifax. They used to be higher in PEP days than they are currently. So, this artificially pushes plans with a target growth rate of 7.5% into deficit even if they are achieving that.

ISAs should use 5, 7 &9% with 7% been middle target and 5% being a safer target. I use 5% as the figure to aim with but you would like to think a decent fund spread would average double figures over the long term.

A basic fund balanced managed fund would be closer to mid rate and FTSE tracker mid to high but more volatile.

Sunday_Morning

dunstonh wrote: »

The FSA sets the projection rates not the Halifax. They used to be higher in PEP days than they are currently. So, this artificially pushes plans with a target growth rate of 7.5% into deficit even if they are achieving that.

ISAs should use 5, 7 &9% with 7% been middle target and 5% being a safer target. I use 5% as the figure to aim with but you would like to think a decent fund spread would average double figures over the long term.

A basic fund balanced managed fund would be closer to mid rate and FTSE tracker mid to high but more volatile.

Thanks for the response...but I still don't see the logic of 7% being a middle target now when 6% was the middle target 11 years ago, especially if, as you say, projection rates used to be higher in the PEP days. 11 years ago nearly all the economic indicators were pointing in a much more positive direction that they currently are. I would have thought this good cause for the middle projected growth rate to be less than it was, not more!

Looking at it another way........The deduction from my bank account each month is a combination of the endowment plus an amount for life insurance designed to cover the difference between the loan and the value of the endowment. (Strangely these figures have remained constant for the entire 11 years, despite the fact that the documents I got at the start refer to only the first five years being fixed. I'm curious as to why the life insurance part hasn't declined to reflect the reduction over time in the amount of life assurance as the endowment grew.)

I've now been paying this for 11 years or 132 months. It turns out that current value of the endowment is 90% of the sum of my deductions in total, and represents by my reckoning a rate of just under 3.5% APR growth based on purely the endowment part. Even if the growth rate achieved for the remainder of the term was DOUBLE what they achieved to date, I would still have a shortfall.

Now I recognise that, despite the value of the stock market going up over 36% in the lifetime of my mortgage to date, this doesn't in itself equate to a return as good as even 3.5% APR. But if someone from eleven years ago was able to listen to economists talking about good things had been over that period of time, and then make projections based on those comments, they surely would laugh themselves silly at the prospect of obtaining a rate of growth equivalent ONLY to 3.5% and would instead be perhaps talking double figures. Especially with the optimism with which the future at that time was already being viewed. Which is why I fail to understand the thinking that lies behind FSA's choice of 7% as a good "medium" range now when the economic outlook is comparativly very bleak.

I appreciate I may be looking at things in a competely wrong way. But the way I see it is this. In the last 14 years the FTSE has risen by about 168% which represents an APR of around 2.1% APR. I'd say that lags behind inflation and earnings on savings account in the same period. There might have been higher returns back further, but then inflation and interest rates were higher as well.

Therefore, unless those economists are wrong to proclaim that the days of high inflation and high interest rates akin to what we experienced in the 70s and 80s are over, I think therefore that projections of 7% look hugely exaggerated. Disappointment lies around the corner for anyone who falls for the same old lines I did back 11 years ago now.

Going back to the graphs I was shown at the outset of my mortgage. If I can look at them now without the naive eyes I had back then, and find them to have misrepresented the discrepancy between the rise in the stock market and the equivalent rise over the same period in interest rates and inflation, would I then have a case against the Halifax?

dunstonh

I still don't see the logic of 7% being a middle target now when 6% was the middle target 11 years ago, especially if, as you say, projection rates used to be higher in the PEP days.

The adviser has the choice to select what target growth rate is used. I used to set up endowments with 4.4% target growth rate. That figure is a nothing figure from an official projections point of view but it was one of the options I had available (I was a tied agent at the the time). Projections on those now use 4, 6 & 8%. Providers can choose to use lower than FSA for projections but cannot use higher. This can result in inconsistencies which create confusion if you dont know what to look out for.

I'm curious as to why the life insurance part hasn't declined to reflect the reduction over time in the amount of life assurance as the endowment grew.)

Its effectively a decreasing term assurance with the premiums averaged over the term to give a fixed premium. A yearly renewable term is not as desirable and although it can be cheaper for some it is not a popular option.

Which is why I fail to understand the thinking that lies behind FSA's choice of 7% as a good "medium" range now when the economic outlook is comparativly very bleak.

The 5, 7 & 9 are used regardless of quality. With medium risk and higher I tend to come in with double digits as the long term average. So, the 5, 7 & 9% historically understate typical performance for me. They are much more realistic for the cautious investor though. They are also more realistic for lower quality investments churned out by the banks.

But the way I see it is this. In the last 14 years the FTSE has risen by about 168% which represents an APR of around 2.1% APR. I'd say that lags behind inflation and earnings on savings account in the same period. There might have been higher returns back further, but then inflation and interest rates were higher as well.

Monthly contributions would mean that you arent all invested at the start and it can take a very long time to build up and actually start making money. You started 11 years ago. You paid about 3 years before the major decline at the start of the decade. We are still lower than that point on the FTSE100. If your contributions are going into a FTSE tracker then then you shouldnt expect much. The growth in stockmarkets has been mainly abroad and outside the FTSE100.

would I then have a case against the Halifax?

No. Past performance charts are just that. They are no indication of future returns. The FTSE 100 (which I keep assuming you are in but you havent confirmed) hasnt been the right place to invest for the last 14 years. FTSE100 trackers have been below sector average that whole time (although have picked up in last few months). The period before that, the FTSE100 was the place to be and its just a case of timing.

The concept of investing for repaying the mortgage is good. The way the banks did it was too simplistic but within the rules. You have one fund and not a great one. The ones I have on the go have 4-10 funds and utilise areas like Emerging countries, India, china, natural resources, europe etc and get rebalanced against safer areas periodically to protect profits. Yours is left to its own devices. Just because you and I are critical of the way they do it, doesnt make it a mis-sale on that account.

Sunday_Morning

Dustonh

Great response of yours. In my heart of heart I think I know I have no case against them. I just have a lot of frustration to get rid of :-)

The decision for me now rests around weighing up whether it's time to switch to repayment, or another vehicle rather than trust the Halifax to keep running it.