Endowment Redress Calculation

Deal_Surfer · 17 October 2010 at 7:51PM

The below may seem obvious to many, so apologies in advance if this is the case, but I have my reasons for asking this question:

My Endowment Policy provider has up-held my recent mis-selling complaint and has offered me compensation. They have confirmed they used ‘Mortgage Fundamentals’ software to calculate compensation (which is approved the Financial Ombudsman Service) and adhered to The Financial Services Authority guidelines i.e:

‘In the most straightforward cases, to calculate the loss, a firm needs to compare:

the total amount the consumer has actually paid in endowment premiums and mortgage interest payments
with
the total payments they would have made on an equivalent repayment mortgage (and, if appropriate, any insurance premiums for life cover)
and
the current “surrender value” of the endowment policy with the amount of capital the consumer would have paid off an equivalent repayment mortgage by now’.

Assuming the below figures are correct (when using ‘Mortgage Fundamentals’ software to derive certain figures) and in conjunction with the known figures I provided, what should be the compensation figure offered (excluding any costs to convert from an endowment mortgage to repayment mortgage):

Interest Only Mortgage total payment is £47,945.70 inclusive of Endowment premiums totalling £11,343.42.

Interest Only Mortgage ‘Balance’ = £40,548.46

Repayment Mortgage total payment is £46,690.33 inclusive of Decreasing Term Assurance premiums totalling £1,826.82.

Repayment Mortgage ‘Balance’ = £28,866.94

Current Endowment Surrender Value = £11,574.61

As I said, I have my reasons for asking this question, but based on the FSA’s guidelines and the known values above, what figures are you guys coming up with…? :think:

Deal_Surfer · 17 October 2010 at 9:51PM

Surely this is a no brainer for you dunstonh?

Annisele · 18 October 2010 at 8:26AM

I'm not coming up with any figures at all - I don't even know what term your mortgage was over, when it commenced, or what the interest rates were.

Has the company sent you the mortgage fundamentals calculation? If it entered the details correctly it's pretty hard to screw up. You might not be able to check the actual calculation all that easily, but you can check term/interest rates etc.

If you were single with no dependants then the DTA part of the calculation might be challengable (if so, it might increase your compensation by £1,826.82).

dunstonh · 18 October 2010 at 9:05AM

I dont have the software or means to check the calculations and there is some info missing. However, effectively, the calculation should put you back into the position you would have been had you been on a repayment mortgage using actual rates or the Halifax SVR. There is an exception to that where the endowment is no longer used for the mortgage. The calculation point becomes the point it was last used as a mortgage repayment vehicle.

If you have no financial dependants, then as annisele says, you can get the life assurance element removed. However, it should be included if its a joint mortgage or have dependants.

Normally, the companies lay out how they have calculated it. So as long as the input figures are correct, the outcome should be correct as well.

Deal_Surfer · 18 October 2010 at 10:03AM

Thanks Annisele and dunstonh for looking at this.

It’s interesting that you’re not seeing the answer in the question, as my policy provider has based it’s calculations on the figures I’ve given above i.e. it can see the answer, which quite frankly I’m struggling to understand also???

In layman’s terms, the FSA has published an example based on the below:

Established facts

Endowment surrender value = £3,200
Capital that would have been repaid under equivalent repayment mortgage = £4,200
Surrender value less capital repaid = £1,000
Cost of converting from endowment mortgage to repayment mortgage = £200

Total outgoings to date

Equivalent repayment mortgage (capital + interest + decreasing term assurance life cover) = £21,950
Endowment mortgage (endowment premium + interest) = £22,250
Difference in outgoings (repayment – endowment) = £300

Basis of compensation

Loss from surrender value less capital repaid = £1,000
Loss from total extra outgoings under endowment mortgage = £300
Cost of converting to a repayment = £200

Total loss (and therefore compensation due) = £1,500

***********************

Now lets apply that to my situation:

Established facts

Endowment surrender value = £11,574.61
Capital that would have been repaid under equivalent repayment mortgage = ? *
Surrender value less capital repaid = ? *
Cost of converting from endowment mortgage to repayment mortgage = n/a in my situation

Total outgoings to date

Equivalent repayment mortgage (capital + interest + decreasing term assurance life cover) = £46,690.33
Endowment mortgage (endowment premium + interest) = £47,945.70
Difference in outgoings (repayment – endowment) = £1,255.37

Basis of compensation

Loss from surrender value less capital repaid = ? *
Loss from total extra outgoings under endowment mortgage = £1,255.37
Cost of converting to a repayment = n/a in my situation

Total loss (and therefore compensation due) = ? *

* The missing figures CAN be derived from the values I provided in my original post along with a simple calculator (ignore any other potential factors), so now what figure do you come up with for 'compensation due'?

Annisele · 18 October 2010 at 12:57PM

Deal_Surfer wrote: »

* The missing figures CAN be derived from the values I provided in my original post along with a simple calculator (ignore any other potential factors), so now what figure do you come up with for 'compensation due'?

Nope, sorry, I can't calculate the missing figures from the information you've provided.

I don't know when your mortgage began, or what interest rate you paid, or how much you borrowed - so I don't know what the balance of an equivalent repayment mortgage might be (and I don't have the appropriate software atm either).

The endowment company might not know full details of your mortgage either - but it will know when your endowment began, so (if you haven't given it mortgage details) it could reasonably assume that your endowment and mortgage began on the same date, for the same amount, and the interest rate you paid was Halifax SVR.

If the endowment company has calculated on the basis of Halifax SVR, then the true compensation due to you might be higher or lower than they've offered. But - if they recalculate and the true figure is lower - they won't generally reinstate the higher offer.

Get them to send you the full mortgage fundamentals calc. The first page lists the assumptions they've used (that might go onto two pages if there are a lot of assumptions). If those assumptions are correct, then the compensation amount is almost certainly also correct (except for possible issues over DTAs).

Deal_Surfer · 18 October 2010 at 1:30PM

Hi Annisele,

I think I’ve really confused things here…sorry…

O.K. – my policy provider has offered me compensation – it’s all based on the original information that I provided after they sent me a mortgage endowment questionnaire and then up-held my complaint. They used Mortgage Fundamentals software to carry out the calculations and provided me with printouts (including the interest rates that were applied since taking out the policy) – I don’t have a problem with that.

This is where I’m confused and why I posted all of the previous correspondence:

Capital that would have been repaid under equivalent repayment mortgage =

Would the answer to this be:

Interest Only Mortgage Balance (£40,548.46) - Repayment Mortgage Balance (£28,866.94) = £11,681.52

OR

Repayment Mortgage total payment of £46,690.33 (inclusive of Decreasing Term Assurance premiums totalling £1,826.82) - Repayment Mortgage Balance at £28,866.94 = £17,823.39

Which would of the above formulas specifically answers that question - Capital that would have been repaid under equivalent repayment mortgage?

Annisele · 18 October 2010 at 6:13PM

Deal_Surfer wrote: »

This is where I’m confused and why I posted all of the previous correspondence:

Capital that would have been repaid under equivalent repayment mortgage =

Would the answer to this be:

Interest Only Mortgage Balance (£40,548.46) - Repayment Mortgage Balance (£28,866.94) = £11,681.52

OR

Repayment Mortgage total payment of £46,690.33 (inclusive of Decreasing Term Assurance premiums totalling £1,826.82) - Repayment Mortgage Balance at £28,866.94 = £17,823.39

Which would of the above formulas specifically answers that question - Capital that would have been repaid under equivalent repayment mortgage?

Oh, sorry, I'd misunderstood the problem.

Neither of your formulas will do it (though the first one is close).

I think that what you want to use is:

[original amount borrowed] - [balance of your hypothetical repayment mortgage].

Edit: So probably something like £45,500ish minus £28,866.94.

Deal_Surfer · 18 October 2010 at 7:26PM

Hello again Annisele,

THANK YOU so much for your reply, which is of great interest….upon receipt of my offer from my policy provider, I understood that I was at the mercy of them making the correct calculations and that the FOS would not be interested in being a ‘checking’ service, but it wasn’t quite making sense to me, hence these posts.

I wrote back to them asking them to clarify further how they were making the calculations, this was their final response:

When performing a redress calculation we have to look at the difference you would have paid to an endowment mortgage compared to what you would have paid to a repayment mortgage to ensure that you are put back in the correct position if you had proceeded with a repayment mortgage initially. Therefore, referring to the mortgage fundamentals calculation you were sent with my letter dated 06 October 2010:

Endowment:
Payments made = £47,945.70

Repayment:
Payments made = £46,690.33

Difference: £1,255.37

Endowment Balance = £40,548.46
Repyament Balance = £28,866.94

Difference: £11,681.52

Surrender value = £11,574.61

Sub total £1,362.28

You converted £8.275 to a repayment basis on the 21 November 2002 and this has been applied to the endowment element of the calculation.

The £8,275 converted to repayment basis is not included in the repayment element of the calculation as the whole amount is repayment for the purposes of the comparison calculation.

This is why I’m so confused....and would love some second opinions. Effectively, at this point, they’re now telling me to like it or lump it i.e. take the offer or go to the FOS…

So, am I right in thinking the FOS will come up with a different figure, or should I say, at least use a different method to work out the final result, maybe something along the lines of your suggestion:

Annisele wrote: »

Oh, sorry, I'd misunderstood the problem.

Neither of your formulas will do it (though the first one is close).

I think that what you want to use is:

[original amount borrowed] - [balance of your hypothetical repayment mortgage].

Edit: So probably something like £45,500ish minus £28,866.94.

By the way (just in case it does make a difference), here are the other details that were used within the calculations, as per the info. on the policy providers offer:

The calculation is for the period 09/01/1998 to 24/09/2010, based on a mortgage advance of £42,921.00 and term of 25 years.

For the interest only mortgage (A) as shown, the total payment is £47,945.70 inclusive of Endowment premiums totalling £11,343.42. The Surrender value is £11,574.61.

For the Repayment mortgage (B) as shown, the total payment is £46,690.33 inclusive of Decreasing term assurance premiums totalling £1,826.82.

Notional loss from higher outgoings of £1,255.37 has been taken into account in this calculation.

Compensation is therefore calculated at £1,362.28 (Inclusive of loss from higher outgoings £1,255.37).

Annisele · 18 October 2010 at 7:43PM

Ah, well if you converted part of your mortgage to repayment then they do need to take that into account.

It sounds to me as though the endowment company has got it pretty much right. The actual amount you would have paid off a repayment mortgage isn't all that relevant (though it's used in the calculation).

So far as the £8,275 is concerned, it sounds as though on one side of their calculation, they've modelled what you actually did - including the part conversion - which is what they should do.

On the other side of the calculation, they've modelled what you would have done had they sold you a repayment from outset - which is also what they ought to do. There's no point them assuming that you would have done anything with that £8,275 if they'd sold you the right product from the beginning - there would have been no need to convert it, because it was already on a repayment basis.

The FSA's published example might not be much help to you, because your scenario (with the part conversion) is different. FOS publishes some guidance here, which might be of more use.

In the end, all that really matters is:

Over the term so far, did you pay more for your endowment than you would have done for a repayment? If yes, that should be paid back to you.
If you were to reduce your mortgage by the surrender value of your policy, would you now owe more or less than you would have done if you'd taken a repayment? If you owe more, you should get the difference.

Deal_Surfer · 18 October 2010 at 8:05PM

Hhhmmm, now you put it that way....

I still can't get my head round the whole:

Capital that would have been repaid under equivalent repayment mortgage i.e.

Interest Only Mortgage Balance (£40,548.46) - Repayment Mortgage Balance (£28,866.94) = £11,681.52

I take on board what you're saying about the £8K being used in one way and not in the other, but the numbers still seem strange to me.

All in all, I guess you've just saved me 6-months or so of waiting to see what result the FOS would have come up with (and potentially a lower figure).

Thanks again Annisele.

If anyone else can see a factor in this that Annisele and I aren't seeing, please let us know ASAP, as it looks like I'll be signing the acceptance letter soon and then returning it...

Endowment Redress Calculation

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