EARLY in 1993, at the height of the endowment mortgage controversy, AIB Bank was one of the few lenders that publicly acknowledged the shortcomings of high cost endowment mortgages. Through its assurance subsidiary Ark Life, it designed and launched a considerably better value substitute called Surplus Builder.
Today, four years later, AIB and Ark Life have brought out its latest version of Surplus Builder, as part of a wider programme to update all its savings and investment contracts. Like the new pension plan, the new Surplus Builder has among the lowest charges of all savings policies on the market with the nil allocation period abolished. (The nil allocation period is the initial months when no money is going into the investment fund, but is absorbed by charges and commissions. In the case of the old Surplus Builder the nil allocation period was 10 months.)
With the recent shake up in the fund management division, it will hopefully provide the sort of fund performance that will either help to pay off the mortgage early or produce a healthy surplus at the end of the mortgage term.
Surplus Builder is essentially two products linked together under the one contract - an AIB mortgage and a mortgage protection policy/low cost PIP (Personal Investment Policy) Managed Fund. The mortgage is set up as a standard annuity type, with both interest and capital being paid off. The mortgage protection policy is a decreasing value one, in line with the decreasing value of the homeloan while the PIP is designed to provide you with a reservoir of cash with which to pay off your mortgage early in order to avoid future interest payments, but which can also be drawn down at any stage to help pay for home or other improvements.
Where the Surplus Builder and the old endowment mortgages fundamentally differ is that this new product is not primarily designed to pay off the loan at the end of the 20 or 25 years; the policyholder is ensuring that by taking out the annuity mortgage in the first place and paying off both capital and interest. With this product, there are no nasty surprises at the end of the term, hopefully, only good ones in the form of a healthy savings balance.
The cost of Surplus Builder (that is the mortgage protection policy plus the PIP) is calculated at less than 1 per cent of the mortgage, or about 80p per £1,000 paid per month and would cost approximately £48.91 per month on a typical AIB mortgage of £50,000 for buyers aged 29. (The mortgage protection part is £8.91 per month, and £40 a month savings. A £1 discount applies over standard Ark Life mortgage protection policies of the same value.)
After 20 years, and contributions worth £9,600, the final fund value of this Surplus Builder plan at growth rates of 7 per cent and 9 per cent, (the permitted IIF illustration levels), are £17,733 and £22,301 respectively. But even after 10 years and contributions of £4,800 the fund is still worth £6,073 and £6,742 respectively. There is an annual management fee of 1.5 per cent and a 5 per cent bid/offer spread charge, but Ark will pay a 1 per cent per annum loyalty bonus if you keep your policy for more than 10 years.
Taking out a savings policy as well as a new mortgage can seem like an enormous extra expense, but it is a sensible financial planning decision. The long term implications of using the savings to pay off a mortgage early makes any early payment hardship well worthwhile. The other good thing about a policy like this one is that the single monthly payment should also act as a deterrent to cashing in the policy too early or for anything less than a serious financial crisis.
