Mr F, from Carlow, and his wife are keen to get their finances in order. They have two major concerns: the performance of their endowment mortgage, which has 10 years to run and a significant £9,000 debt with their credit union.
"We have a National Instalment Savings Scheme [NISS] with the Post Office and save £80 a month at present. My question is, because endowments are not getting a great press and NISS rates are reducing, does it make good financial sense to switch to an annuity mortgage using our £80 a month earmarked for NISS as well as what we now pay for our mortgage and at the same time retain our endowment policy as an educational policy for our children?"
Fortunately for Mr F, his 20-year endowment mortgage worth just £31,500, is a conventional with-profits version taken out with Standard Life and is worth £19,000, he writes.
Had it been a more widely sold unit-linked one, he would have some cause for concern and may have had to consider increasing the monthly premium simply to ensure that the home loan was paid off in 10 years time. This one is most likely on target to repay the £31,500, but that does not address his dilemma - what to do about the falling interest rate he is getting on his savings, and his outstanding debt with the credit union.
"Your reader has presented a classic case of the value of debt outstripping the value of savings," says an independent financial adviser who examined the case for Family Money. "It simply doesn't make sense for him to be paying into the Post Office, where the return is under 5 per cent, when he is paying off a mortgage at, presumably, a higher rate of between 6 and 7 per cent and a credit union debt of perhaps as much as 1011 per cent.
"The first thing he should do is clear off the credit union loan with the NISS savings, since with those kind of interest repayments he shouldn't be saving in any account that doesn't pay in excess of 10 per cent. The next question he needs to ask is whether or not the endowment investment is outperforming the cost of borrowing on the mortgage," the adviser says.
"Standard Life is one of the better with-profit providers, but no one knows what kind of terminal bonus it will be paying in 10 years time, and bonus rates are coming down, as the Family Money personal pension survey has shown. The internal rate of return of with-profit pension funds is in the region of 8-9 per cent and remember, these funds are tax exempt. Endowment mortgage funds are not tax-exempt and I think we can assume that the annual return over the period of his loan from this fund will be closer to 68 per cent. "If the 20-year interest rate averages at less than the 20-year return from the investment fund then the endowment investment will have been worth having. But if the interest he pays ends up at more than 6-8 per cent - and this may very well be the case - then he should consider paying off capital on the home loan with the £80 a month that he would have continued to pay into the Post Office savings scheme." That monthly payment in the form of a 10-year annuity loan should be sufficient to make significant inroads into the outstanding £31,500 capital, the adviser says. Meanwhile, Mr F should keep paying his endowment policy, in order to take full advantage of the final bonus terms.
Suggestions welcome
Family Money welcomes suggestions from readers on topics of personal finance they would like to see highlighted. Please write to Jill Kerby, c/o The Irish Times, 11-15 D'Olier Street, Dublin 2 or by Fax No. 6798874 or by e-mail: jmkerby@indigo.ie
