PEPs Outperform Endowment Mortgages by a Mile, Report Finds

New homebuyers considering a mortgage should opt for PEPs (Personal Equity Plans) over endowment mortgages, a report by GM Benefit Consultants has found. The study, which compared the financial performance of PEPs, endowment, pension, and repayment mortgages over a 25-year period, revealed that PEPs are likely to return much more than their endowment or repayment counterparts, but are more exposed to stock-market risk. The report's author, Duncan Howarth, noted that despite his findings, most mortgages being taken out are still on an endowment basis, largely due to aggressive sales tactics by building societies and high commissions paid on endowment sales.

Key Takeaways:

• Repayment mortgages are the safest and cheapest option in terms of total outlay, but produce nothing extra in the form of a lump sum.
• PEPs cost more initially, but are likely to return much more than repayment or endowment mortgages, growing tax-free while endowments are subject to taxation.
• Returns from endowments are likely to be lower than expected, and a high percentage never reach maturity, making them "a poor investment".
• Pensions, which are tax-free and attract tax relief, perform much better than endowments but are not ideal for mortgages, as a significant portion of the tax-free cash would need to be used to repay the mortgage.
• The high commission payments paid on endowment sales contribute to their poor performance.

Statistics:

• A 25-year, £50,000 mortgage at an interest rate of 7.74% is the basis for the report's figures.
• The borrower is assumed to be a male aged 25.
• Mortgage protection and life assurance costs are included in the figures.
• Pension contributions are assumed to be £3,000 per year for 25 years.

Mortgage Comparison:

| | Repayment | Endowment | Pension | PEP |

| --- | --- | --- | --- | --- |

| Total outlay | £76,419 | £115,141 | £93,656 | £83,046 |

| Lump sum at maturity | £0 | £20,191 | £31,109 | £58,191 |

| Tax burden | £0 | £6,261 | £2,447 | £2,447 |

Sources:

• GM Benefit Consultants, an consulting actuary, produced the report comparing PEPs, endowment, pension, and repayment mortgages.
• The Sunday Times, 1994, copyright reserved.