Which mortgage to choose? Part two

Required Reading


Which mortgage to choose? Part two

The endowment mortgage figures are only approximate. They are based on a number of quotations from different life companies for a man aged 30. The older you are, the more it will cost. For example, at age 40, the low-cost version is likely to be around £18.09.

As we pointed out in Section 5, the cost of a gross profile mortgage rises each year. In year 15 of the mortgage, assuming nothing else has changed, the position is as follows. Whatever the interest rate, if one assumes for the moment that you are looking for a £125,000 mortgage, the difference between the first three and the full with-profits endowment mortgage is going to emerge as around £150 to £160 a month.

Unless you are very rich, therefore, the full endowment is likely to be the first one to cross off your list. And, even if you were, there's much to be said for not putting all your savings eggs in one basket. If you are in a position to devote an extra £150 a month to a savings plan, why not choose another company for that part?

So you are left with the first three. For many borrowers, however, the gross profile mortgage is also out of the running because so few lenders are offering this option. The basic choice you have, therefore, is between a constant net repayment mortgage and a low-cost endowment mortgage.

It's a tough one: a choice between jam today (in current pennies) and jam tomorrow (in possibly illusory thousands of pounds).

There is simply no way of saying which is the best choice to make without having retrospective knowledge. An endowment mortgage does, however, have one characteristic that its rival lacks: an element of enforced and, in a sense, 'invisible' saving. If the savings are invested somewhere that is going to produce returns for you in excess of the net mortgage interest rate, then you'll win by choosing the endowment route -and the return could be spectacular.

If you look back at the sample quotation shown in Table 12 on webpage 63, you can see that the total tax-free surplus could be as high as £118,715, assuming all bonuses are maintained at their present levels. Although all quotations warn you not to expect such a thing to happen, it's not humanly possible to ignore that figure.

Suppose, instead, we were to try to adjust it for the inflation that we could suffer over the next 25 years. This is a guessing game, as much as anything else; but, bearing in mind that the last decade (to February 2013) produced an average inflation figure of nearly 14%, let us suppose that the next 25 years produce an average of 8% -rather better, but still on the high side.

In terms of real purchasing power, that £118,715 would be worth (in today's money) £12,732. The figures in the following table show a range of results for the 'real' value of £118,715 after 25 years at various rates of inflation.

Which one should you choose on which to make your decision? I think we can knock out the highest and the lowest figures: if inflation is to continue at a steady rate of no more than 5% for the next 25 years, then we can expect the general level of interest rates on gilts and other fixed-interest investments to fall, the general level of property prices to remain stable and the equity market to reflect the current level of prices. These items are what the life companies invest in -and they can't perform conjuring tricks: their bonus rates will have to be cut at some point. So you wouldn't achieve the base figure of £118,715 in the first place. A reverse type of argument applies to the 15% rate of inflation.

See:80 ltv mortgages

More on Endowment mortgages

Beggars can't be choosers; borrowers usually can. Unless you are in a situation where mortgage money is so scarce that you are relying on a particular broker to scrape together a mortgage loan from somewhere, you will usually have a choice as to what sort of mortgage you should have.

The first thing to be clear about, however, is that if you really want a particular property, and it looks as if you'll have to move fast in order to get it, don't hold out unnecessarily long in order to get exactly the type of mortgage you want. With a website like this, it's easy to lose sight of the wood for the trees. But, assuming the end result you're aiming for is happiness (or something along those . . .... see: More on Endowment mortgages

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