The first, on page 7, reports on proposals from the Department of Trade and Industry to alter the way the Annual Percentage Rates are calculated. In essence, unless the DTI changes its mind, its plans will unintentionally make endowments look a better deal than repayment mortgages.
This is because the current proposals will force repayment mortgages to include the life insurance element of the loan when calculating the APR. But endowment-backed mortgages, where the premiums include an element for life cover, will not.
This comes at a time when financial regulators are telling insurance companies that they must cut their "projection rates" for endowments, as well as pensions, as our other story indicates on page 5.
Projections are the assumed value of a fund if it grows at a certain rate each year until maturity. They are used to give investors an idea of how much money they will get assuming a certain growth rate, as well as telling them what percentage of their contributions will be taken in charges. Until now, three sets of projections are given, involving assumed growth rates of 5 per cent, 7.5 per cent and 10 per cent. But the Personal Investment Authority, concerned at the possibility that equity markets may not deliver such high returns, is requiring rates to come down. From January, advisers and salespeople will only be able to quote projected growth rates of 4 per cent, 6.5 and 9 per cent.
The PIA is concerned that investors' assumptions of long-term returns may be too optimistic. This means that anyone thinking of an endowment- backed loan will almost certainly be asked to pay more to the policy in order to achieve the lump sum they need to pay off the loan. Our figures indicate that on a 25-year mortgage, a lower projected rate means payments on a Scottish Life endowment, linked to a pounds 75,000 loan, would rise from pounds 65.44 to pounds 73.75, assuming mid-scale growth.
The first step any Independent reader should take if they have an endowment already is to contact their insurer and ask what premiums would have to rise to if a lower growth rate is assumed. Be prepared to up your contributions accordingly.
As for new borrowers, these stories mean that there is a need to be even more vigilant when considering the merits of endowments versus other means of paying off a home loan.
HOW DO you ensure a recalcitrant journalist is kept "on-message"? Why, you buy him lunch, of course.
This is the outcome of the two mildly jokey pieces in this column about Egg, a new subsidiary of Prudential, which is offering a market-leading current account.
Sadly, few people, myself included, have been able to open an Egg account because its call centres have been swamped by more than 1 million applicants.I am told, however, that the original 28-day wait before an account is opened is being cut to a week or so.
Meanwhile, I have been offered lunch with Egg's chief executive, Mike Harris, presumably so that I can pass on glad tidings to you. So, no more egg jokes. Finished. Finito. Mmm, I wonder if they serve omelettes...Reuse content