OPINION: Broker’s advice remains invaluable
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Together with millions of others, my wife and I were happy to leap aboard the interest-only mortgage bandwagon which became enormously popular during the 1980s.
Securing an interest-only loan effectively enabled mortgagees to buy their homes without the immediate need to repay any capital. Repayment would, of course, have to be addressed eventually, but the prospect of acquiring a home on such a cost-effective basis outweighed any pressing considerations relating to precisely how the money would be paid back.
Lenders, by contrast, kept their eyes firmly on the loan repayment ball.
You see, interest-only mortgages were readily available provided property buyers took out an endowment policy with an insurance company. The policies were theoretically designed to repay the mortgage in full, usually within a 25-year term. In addition, banks and building societies generated handsome commissions each time one of their borrowers signed up for an endowment policy.
On paper, this looked like a win-win-win arrangement for lender, borrower and insurer. Moreover, not only did endowment policies appear to be the answer to property buyers’ dreams, brokers and advisers (bear in mind these were pre-IFA days) regularly forecast attractive returns well in excess of the amount required to pay off the mortgage 25 years hence. What could possibly go wrong?
Regrettably, interest-only mortgages, seemingly covered in full by the projected longer-term returns generated by endowment policies, proved disastrous for many thousands of people. Which is why, several decades later, I remain enormously grateful to Mike Ring, the Bristol-based broker who arranged our endowment policy designed to repay what at the time felt like a colossal interest-only mortgage.
Following approval of our interest-only mortgage, we had only to sign the endowment policy paperwork and the solicitors could exchange contracts on our new home. However, Mike called and said there was something he wanted to discuss with me. Concerned there might be a last-minute hitch, I careered to his office.
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“Pay the guaranteed sum premium,” he declared as soon as I walked through the door. “It’s another eight quid a month but means there’s no doubt about the payout. You don’t want to be ten grand short when the time comes to repay your mortgage, do you?”
As succinct arguments go, it took some beating. We added the guaranteed sum clause to our endowment policy agreement and have often reflected upon our good fortune ever since. What a great move it proved.
Why? Well, within a decade, it became apparent that problems had arisen with endowment policies. At first, there were rumours that some policies may come up a little short at the end of their mortgage term. Soon, there was no doubt that the eventual returns on unprotected, non-guaranteed policies would be insufficient for borrowers to repay their interest-only mortgages.
At the same time, our annual endowment policy statements began declaring in bold, red font that there was no need to worry about any shortfall because we had secured a guaranteed repayment of the exact amount required to repay our interest-free mortgage loan. Without Mike’s last-minute intervention, we would probably have been around £27,000 short. The £8 monthly endowment policy supplement, or ‘belt-and-braces insurance’ as Mike called it, saved us a fortune.
I was reminded of Mike’s invaluable advice when renewing my car insurance recently. While comparing a host of annual ‘fully comp’ insurance premiums, I also pored over a range of add-on benefits offered by several insurers. Some attractive benefits, such as legal cover, were already included in most insurance policies I examined, while windscreen cover was available at a modest cost. Breakdown cover did not, however, come as standard.
I considered the age and value of my car. According to the comparisons I examined, breakdown cover tended to include the cost of transporting the driver and their car to the nearest garage or their home. It wasn’t particularly expensive, but could it be justified? Was it absolutely necessary?
I wasn’t convinced until I happened upon an additional perk of breakdown cover provided free of charge by one insurer. "Should your vehicle be off the road," their policy summary read, "you will be supplied with a replacement courtesy car at no extra cost".
Considering the cost involved, I experienced a brief Mike Ring moment. I could almost hear his familiar west country burr urging me to pay the modest premium and enjoy what insurers call ‘peace of mind motoring’.
Though the breakdown cover/courtesy car add-on increased the cost of my annual car insurance by a small amount, I saw no reason why Mike’s advice, which had worked so effectively all those years ago, shouldn’t be employed again.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.