The UK Mortgage Industry

Chris Boyle 

The Stock Market

With an interest only mortgage borrowers must use an investment vehicle to accumulate enough money to repay the loan capital at the end of the mortgage term. This can be in the form of an endowment, a personal pension plan or an individual savings account (ISA).

The money invested into these vehicles is put into the stock market, usually either by a bank or an insurance company. Over the mortgage term the investments should mature, if it is regularly supplemented, and managed well, although there is an element of risk involved. This is where a detailed knowledge of the stock market is required, to make sure that endowment holders do not experience a shortfall at the end of their mortgage term. Unfortunately this has occurred many times due to poor returns from the stock market in recent years. Many claims have been made about miss-sold endowment policies.

In these cases some investors have been liable to receive compensation because their investment returns were not predicted accurately. The insurance company Royal and Sun Alliance was fined nearly one million pounds on 27th March 2003 by the city watchdog for miss-selling endowments to mortgage holders (Burridge: 2003: The Independent). This is a prime example showing that a good understanding of the stock market is essential in order to not only make money, but also avoid losing money in the case of miss-sold endowment policies.

The stock market is an integral part of the mortgage industry. It is a place for the buying and selling of stocks and shares. The government and public limited companies (PLC's) can sell bonds and shares on the stock market. New stocks and shares are sold as a cheap method of raising finance. PLC's sell shares in various forms, mainly to financial institutions such as insurance companies and banks. In return for providing them with the cheapest form of finance available PLC's can choose to pay shareholders a percentage of their profits (dividends) or an interest rate.

Dividends are not guaranteed returns but they are likely to be the most lucrative return (if paid on ordinary shares), whilst carrying the highest risk of no return. Shareholders are part owners of the company they have invested in. If that company performs well its shareholders should benefit from its success. Businesses sell shares to raise finance, monitor their performance, allow for mergers and acquisitions to take place more easily and to distinguish between the owners and the managers.

References

Burridge, N: 2003. Insurance giant fined £950,000 for mis-selling endowments. (Online Abstract). Accessed: 13th May 2004.