Clearing the air on policies : A new rule may help buyers to find value for money, says Maria Scott

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The Independent Online
PEOPLE shopping for mortgages, pensions and a host of other financial products should find it easier to work out which ones offer best value for money from the beginning of next year.

Kenneth Clarke, the Chancellor, announced on Thursday that all purveyors of financial products, including insurance company salespeople and agents such as banks and building societies, must state how much commission they will be paid when they sell a product.

His announcement came days after a World in Action documentary that attacked the insurance industry and banks and building societies over the sale of endowment mortgages. It suggested that endowments might not be so widely sold if they did not produce hundreds of millions of pounds of commission for lenders.

At present, this commission is hidden from consumers.

Andrew Gilkes, a 30-year-old university librarian, is a first-time buyer who feels uncertain why an endowment loan has been recommended to him.

With an endowment mortgage the borrower relies on the proceeds of an insurance policy to pay off the original loan, whereas with a conventional repayment mortgage the debt is paid off gradually over the years.

Mr Gilkes, who lives in Reading, Berkshire, has just started looking for a flat and has his eye on a two-bedroom maisonette. He is single and has no children or other dependents.

He recently visited his local Abbey National branch to inquire about mortgages. 'I was told that I could have a repayment mortgage if I wanted one, but that I would be strongly recommended to take out an endowment.'

'I was given figures which showed that the endowment would work out at a cheaper monthly repayment and was told that 'really a repayment mortgage has nothing going for it'. '

Mr Gilkes was puzzled because he was aware of doubts about investment returns on endowment policies. Although most long-term contracts should earn enough to repay mortgages, they may not produce large lump sums on top - one of the main carrots held out to prospective purchasers.

He was also aware that endowments tend to cost more per month than a repayment loan when interest rates are high.

Abbey National, which now owns its own life insurance company and sells this company's products from its branches, confirmed that a record of the interview with Mr Gilkes showed he had been recommended an endowment although Abbey could not give specific details why.

The staff member who spoke to him was on holiday. An Abbey spokeswoman denied, however, that the bank pushed endowments at the expense of repayment mortgages.

Independent advisers were less equivocal about the suitability of an endowment for Mr Gilkes. The main doubt in their minds was whether he needed the built-in life insurance with an endowment, especially since he belonged to a local government pension scheme that might already provide him with cover sufficient to repay his loan if he died.

Philip Cartwright, senior manager at London and Country Mortgages, a subsidiary of the independent adviser Chase de Vere, explained: 'Some lenders insist on life insurance but not all, and it could be argued that he does not need it. If he died and the property was sold at a loss his next of kin would not inherit the debt unless they were guarantors.'

Joanna Stone, of the adviser Murray Noble, worked out that Mr Gilkes could expect to pay just under pounds 330 a month for an endowment mortgage at typical current interest rates, including a pounds 64-a-month endowment policy premium, for a policy from Standard Life.

He would pay just over pounds 330 for a repayment loan, including pounds 8.70 for a mortgage protection policy from Provident Mutual to repay the loan if he died.

Mrs Stone said she could see only one advantage with the endowment. If Mr Gilkes moved house after a few years his insurance policy would have built up some value and could be switched to another loan.

This would in effect count towards repayment of that debt, whereas with a repayment loan he would be starting afresh with the temptation to lock into another 25-year loan.

However, with a repayment mortgage he could pay off chunks of the loan any time if he wanted and would not be tied into a long-term investment contract. With the endowment- linked loan he would be obliged to keep up this contract unless he wanted to suffer early redemption penalties.

Mrs Stone said that on the whole her firm was not recommending conventional with- profit endowments at present because of concerns about returns.

'You really need to be assured of a growth rate of 8 per cent a year to be sure it will pay off the mortgage,' she said.

----------------------------------------------------------------- TABLE: REGULAR PREMIUMS ----------------------------------------------------------------- Average up-front commission on a pounds 50 monthly premium Term Independent Appointed (years) intermediary representative (pounds) (pounds) Endowment assurance 10 234 276 25 498 570 Personal pensions 10 174 204 25 372 414 ----------------------------------------------------------------- Source: Lautro -----------------------------------------------------------------

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