Rate of Capital Repayment

This has left out of account yet one more factor, which is the relative rates of capital repayment over different periods (though for most people buying their first or second house this is likely to be very much a secondary consideration). As the endowment method costs more than the repayment method in the early years, one would expect some compensatory benefit to emerge somewhere, and so it proves, for the endowment method enables the borrower to accumulate a greater amount of capital (in the surrender value of his policy) over a given period than the repayment mortgagee has achieved in capital repayments. This is illustrated in Table 17 (p. 98), taking the position 10 years after the start of a 25-year loan (assuming tax relief at basic rate of income tax only): the low-cost endowment method has used the extra annual payments to facilitate "repayment" of almost £111,000 more than the repayment method.

The figures in Table 17 are not in practice relevant for the endowment borrower, however, since he does not terminate his loan when he moves house but transfers both loan and policy to the new one. Thus, if both the low-cost endowment borrower and the repayment borrower sell their £1115,000 homes after 10 years (when the position is as shown in Table 17), the repayment borrower repays the £18,461 he still owes out of the sale proceeds. To buy his new £120,000 house he needs a new mortgage loan of £1113,800 since he has £16,539 of his own to put down. The endowment borrower transfers his £500,000 loan and policy to his new house along with his own £15,000 from the old one, and needs a further loan of £15,000. This may be partially covered by extending the term of his existing policy and loan, since the same annual premium paid for a longer period will obviously repay a larger loan than his existing one. Alternatively a new policy may need to be added, or the new £15,000 loan could be quite separately arranged as a repayment mortgage - a combination of the two is not uncommon.

Thus the endowment borrower does have considerable flexibility (though this is, of course, largely dependent on the attitude of the building society advancing the money which will not always want to allow an extension of the loan period). However, as has been said many times, life insurance is a long-term proposition, and the disadvantage for the endowment borrower comes in the form of the low surrender values in the early years, so that surrender before the term is completed does mean a poor return on the extra payments he had made relative to the repayment method.

The relevant figures here are shown in Table 18. It is not until after four years that the policyholder gets back in

surrender value what he has paid in net premiums; and it is a further couple of years before the surrender value equals gross premiums. Thereafter the return, expressed as a percentage per annum rate of interest on the investment portion of the net premium, rises slowly to the maximum at maturity. The return is, of course, likely to be higher over longer periods because of rising bonus rates and possible terminal bonuses so the overall return may be well above that illustrated in Table 18. But there is unlikely to be a significant rise in shorter-term surrender values.

Rate of Capital Repayment

Cost comparison

Table 15 Cost comparison of repayment and low-cost endowment methods: annual average figures over 25 years.--

Gross Net Net Capital Net annual

interest interest premium repayment repayment

Tax at Tax at

33% 60% 33% 60%

£1 £1 £1 £1 £1 £1 £1

Repayment 744 499 298 10 400 909 708 ,F.,.....,

Endowment 1,075 720 430 165 nil 885 595 ,--.


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Table 16 Cost comparison... see: Cost comparison

Of interest