The repayment of mortgages by endowment assurances
| Date | 01 April 2002 |
| Published date | 01 April 2002 |
| DOI | https://doi.org/10.1108/14635780210420016 |
| Pages | 116-126 |
| Author | Philip Booth,Bill Rodney |
| Subject Matter | Property management & built environment |
JPIF
20,2
116
JournalofPropertyInvestment&
Finance,Vol.20No.2,2002,
pp.116-126.#MCBUPLimited,
1463-578X
DOI10.1108/14635780210420016
ReceivedJanuary2001
Revisedandaccepted
August2001
ACADEMICPAPERS
Therepaymentofmortgages
byendowmentassurances
PhilipBoothandBillRodney
DepartmentofPropertyValuationandManagement,
CityUniversityBusinessSchool,London,UK
KeywordsMortgages,Housing,Inflation,Netpresentvalue
AbstractLooksattheproblemofendowmentassurancesthatdonotmeettheirtargetstorepay
residentialmortgages.Byanalysingthepresentvalueofpaymentsunderdifferentinflationand
interest-rateregimes,weconcludethattheperceivedproblemswithendowmentpoliciesmay
simplybeamanifestationof``moneyillusion''.Nevertheless,therecouldbefrictionalproblems
andotherproblemsarisingfromtheuseofendowmentassurancestorepaymortgageswhichwe
identifybutdonotanalyseindetail.Thefailureofsuchamajormethodofrepayingmortgagesto
performinlinewithexpectationswillhaveimplicationsfortheresidentialhousingmarket.
Introduction
BoothandWood(2000a)lookattheissueofmoneyillusionandthepricingof
mortgagesandBoothandWood(2000b)lookattheissueofmoneyillusionand
thepricingofannuities.Theformerpaperconcludesthatmortgagesarenot
cheapinthecurrentfinancialenvironmentandthelatterthatannuities,whilst
moreexpensivebecauselong-termrealinterestratesarelowandmortality
progressivelyimproving,arenotasexpensiveasmanycommentatorsperceive.
BoothandWood(2000a)lookspecificallyatrepaymentmortgages.Theissues
surroundingendowmentmortgages,wherehomeownersplantorepaya
mortgagewiththeproceedsofanendowmentassurancepolicy,aremore
complex.
Inthecaseofanendowmentmortgage,theoverallcostofthemortgage
dependsontwointerestrates.Theseratesaretheinterestratepaidbythe
borroweronthemortgageandtheinterestrate(orrateofreturnonpremiums)
earnedbytheborrowerontheendowmentpolicytakenouttorepaythe
mortgagecapitalsumattheendofthetermofthemortgage.Theissuesare
furtherobscuredbythefactthatendowmentpoliciestendtobewith-profit(so
thattherateofreturnearnedbythepolicyholderdependsoninvestment
returnsandothersourcesofprofitoftheinsurancecompany)andbythefact
thattherewilloftenbeanunderlyingfixed-interestguaranteewithina
with-profitendowmentassurancepolicy.
Mortgageesmayappearworseoffasaresultoftheirendowmentassurance
policiesnotgeneratingsufficienttorepaythemortgageattheendofitsterm.
Buteveninthiscase,bylookingatthecashflowsoverthewholeofthelifeof
themortgagewefindthatthisisnottrue.However,wealsofindthatthereare
otheraspectsofthesefinancialarrangementsthatneedtobeconsidered.
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