26 Sep 2013, 12:48pm
frugality housing living intentionally personal finance:
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  • When we are lender of last resort, we take your soul

    Paul Tucker, outgoing deputy Bank of England governor, summed up an essential truth about debt 1

    “When we are a lender of last resort to a bank … we take the institution’s soul. And we say we will give you back your soul when you’re healthy and I get my money back,”

    It’s not just banks. It’s any borrower – they swap a little bit of their financial soul for the use of the money now. It’s why I paid off my mortgage, despite knowing the most rational way to maximise my financial position would be to pay it all down bar £1000 and invest the residual amount. Wherever I hear someone who is financially aware and getting ready to pay that mortgage down, I’ll often try and highlight that alternative for consideration. The analytical case for keeping it is best made here, so I won’t bother trying to state it, but it is compelling, particularly for anyone under 45 IMO.

    For me, my soul was worth the opportunity cost. The dead hand of the lender of last resort is symbolically powerful. The lender plays the part of Mephistopheles to your Faust – they have access to resources you don’t have, and will lend them to you. On one condition – they take a charge over part of your soul ;) Where Faust screwed up was accepting a charge on his immortal soul, but if you borrow more money than you can realistically pay back from your future income streams, you’re surrendering yourself to a life of debt-slavery.

    Personal finance is not all about the numbers. It is about your values. Mine were honed over the past few years, as the scales fell from my eyes and I realised at work I was doing something I was ok with most days but in a way that really pissed me off, and I was doing it because I was fearful of the claim of that lender of last resort. It was time to give Mephistopheles the order of the boot.

    Buying a house is all about hope and belief in the future when you're young. You ignore the swish of the arrowed tail departing with a piece of your financial soul...

    Buying a house is all about hope and belief in the future when you’re young. You ignore the swish of the arrowed tail departing with a piece of your financial soul… The demon is forgotten for decades, but he’s still there, and He’ll Be Back when there are grey hairs on these two (photo: xaviernau/iStock)

     

    Because I’ve had it for well over a decade, my mortgage wasn’t that much towards the end. It was a nice tracker, and capped to boot, but it had to go, though I did take the time to mull over whether ownership of my soul was worth the opportunity cost. Had I ramped it back up to 100% 2 and bought the FTSE all-share in April 2009 I’d have been about £20,000 better off if I sold up now. I can live with that.

    2007 mortgage statement.

    2007 mortgage statement. BM didn’t get fat off my back that year :)

    So my soul is worth about 20k, It’s a good deal, that’s the price of peace of mind. I am a lot more risk-tolerant with money that I have made, but less so with money I have borrowed.  That’s because in the 1990s I saw what happens when you buy assets on leverage and they go down. You get to pay months worth of overpayments into a black hole called negative equity. Although an offset mortgage is designed to offset money you have borrowed against money on deposit, in the end it is still a mortgage – the company has a primary charge on your property.

    Mortgages are a young person’s game IMO

    Although a mortgage is nominally charged against the value of a house, what actually pays it off is the future value of your income stream. The future value of a burned out Ermine’s income stream is lower than of the 30-year old in the 1990s 3. It’s why for most people 4  you should have paid off your mortgage by the time you’re 60, because the value of your future income stream starts to tail off for the simple reason you have fewer earning years left. If I were investing in buying shares of people 5 give me an able 30 year old who is honing their craft over a talented 50-year old any time, because the income may be lower but the value of the human capital transforming into a future income stream is higher – because there’s more future!

    It’s why I have little sympathy for over 50s who are still running interest only and grouse that they will have to sell their homes to discharge the mortgage. Let’s take a look at how they got here -

    Underperforming endowments have left many people aged over 50 with interest-only mortgages facing an average shortfall of £49,000, according to [a special interest group pushing their equity release 'solution'].

    Er – no. Let’s try this again, shall we?

    An ostrich-like mentality of ignoring warnings of endowment shortfalls in numerous letters sent to them from the mid-1990s onwards, ie a wilful refusal to act for over twenty years has meant these people failed to address their financial situation despite numerous warnings over decades.

    That’s better. I was one of these people who got those letters in the 1990s. I fired off stinking letters to the endowment company. I opened a PEP (ISA in today’s speak). I pressed my claim and got reset to where I would have been with a repayment mortgage. Guess what I did with the settlement money?

    I paid it right away to the mortgage company as a capital repayment, because that’s what it was – compensation to set me back to where my mortgage should have been.

    Many people considered these a windfall and spent in on a nice new car or that holiday they’d always wanted. It was part of their mortgage, so effectively they were saying ‘let’s have a blowout, and hell, let’s add it to the mortgage’.

    When endowment firms tell you ‘we lied, and you won’t be able to pay your mortgage off’ then the first thing to do is DO SOMETHING, FFS… Hell, that average shortfall of £49,000 would probably only have been an extra annual payment of £1000 (because paying down the capital reduces the interest). The Daily Fail tells us that wisdom comes with age, particularly in temporal discounting which is important in personal finance 6 While at least with temporal discounting this probably does apply to me, it seems unevenly spread in the older population ;)

    The trouble with the demon Mephistopheles is that he plays a long game. It’s easy to forget the long shadow of the repo-man over the typical mortgage term of a quarter of a century. The starry-eyed young Ermine that casually signed way five years of annual income with a flourish of his pen is a different creature from the gimlet-eyed mustelid that signed the cheque discharging the final amount that transferred ownership. But Mephistopheles doesn’t forget, you gotta sign that cheque at some time, or deal with the consequences of the Devil owning your financial soul. I saw that shadow in the 1990s, and learned. My personal finance policy is simple

    Owe nobody any money for more than half a year

    I don’t take it all the way to Shakespeare’s advice to Laertes

    Neither a borrower nor a lender be;
    For loan oft loses both itself and friend,
    And borrowing dulls the edge of husbandry.

    This above all: to thine own self be true,
    And it must follow, as the night the day,
    Thou canst not then be false to any man.

    I do lend money, both as a Zopa-ist, and as a stock-market investor ;) The key is never lending money to any entity or grouping that you can’t afford to lose. I do think the Bard has a point when it comes to consumer debt, though, when he says

    And borrowing dulls the edge of husbandry.

    presumably meaning you don’t take as much care of something you bought on credit as if you saved up your hard-earned beforehand.
    Kate Moss. And no, she wasn't talking about personal finance in 'The Waif that roared"

    Kate Moss. And no, she wasn’t talking about personal finance in ‘The Waif that roared

    It is this casualisation of the value of Stuff that makes the consumer economy go round, fuelled by debt. Mindful of the value of my soul, however, I don’t have to take part in it, because, to paraphrase Kate Moss
    No rush of consumer baubles tastes as good as financial independence feels…
    It’s the low level of needless consumer spending that I found didn’t give me lasting value, and this is particularly injurious to financial independence because it’s unthinking and it adds up. I came to the conclusion that in many ways with decadence it’s better to ‘go large or go home’. If something’s really of value to me, I will, after suitable deliberation, go for it,  if I can imagine looking back and thinking ‘that was a good purchase, given what I knew at the time’ – or even that it was a qualified risk and I accepted the range of possible outcomes. It’s the unthinking drip, drip, drip a little bit here, a little bit there that I have no truck with. I am mindful of the fact that the lender of last resort takes my soul; I would not be financially independent if I owed anyone any money for any length of time.
    Nutty thing to do from a personal finance point of view, paying off your mortgage. But I wouldn’t have it any other way, because I know the value of my financial Soul, not just the price of it ;)

    Notes:

    1. It’s a shame I can’t second-source the original quote. If Philip Aldrick made it up, he’s wasted at the Telegraph
    2. I don’t think this would have been permissible, I could reclaim overpayments but it wasn’t an offset
    3. It’s probably not zero as I suppose a pension is a future income stream, and in some ways more secure than income from employment, you don’t get made redundant from a pension.
    4. I’m talking about wage-slaves working for The Man here, not people whose risk-tolerance is higher than normal, and or people who have unconventional assets like a business or BTL
    5. I know, it’s called slavery, this is a hypothetical thought experiment ;)
    6. Yeah, I know it’s the Daily Mail. It’s peculiarly tough, because young people actually have more future so the cost of getting temporal discounting wrong is higher for them. But it does follow my life experience.

    It never occurred to me not to pay off my mortgage asap since it was at a higher rate than any savings account I could get at the time. Investing was always something I was going to do once I cleared my mortgage debt.

    I hated being beholden to anyone, so paying that mortgage was an absolute priority.

    Actually, I still have a nominal £1 balance left on my mortgage because there’s a final fee once it’s paid off! I can wait…

    Oh come on! You can’t expect to post a Daily Hate link without some sort of backlash. They are as bad on science as everything else!

    Remember that wisdom does come with age, but for many people age comes alone.

    You must be aware of their quest to divide all the inanimate objects of the world into things that cause cancer and things that cure it!

    http://www.anorak.co.uk/288298/scare-stories/the-daily-mails-list-of-things-that-give-you-cancer-from-a-to-z.html/

    ~~~

    The paper they allude to is here (abstract only I’m afraid):
    http://psycnet.apa.org/index.cfm?fa=buy.optionToBuy&id=2013-32609-001

    from here: http://psycnet.apa.org/journals/pag/

    Here’s a sensible extract:
    “Structural equation modeling verified our hypothesis: Older participants’ greater crystallized intelligence offset their lower levels of fluid intelligence for temporal discounting, financial literacy, and debt literacy, but not for loss aversion.”

    Note that it is a single study and as always has a small sample, but let’s face it, the conclusion “old people can’t think as sharply but can draw on greater experience” isn’t exactly ground-breaking.

    ~~~

    Other papers do seem to give weight to the argument that risk taking declines with age:

    http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=231701

    but that they aren’t necessarily better at making decisions

    http://amj.aom.org/content/18/1/74.short

    ” Little evidence was found to support the notion that older managers are less facile information processors and decision makers. ”

    and in fact, can be lazy (or efficient?)

    http://geronj.oxfordjournals.org/content/45/2/P75.short

    “Results indicate that total time to reach a decision did not differ according to age. However, retirement-age participants used less information, spent more time viewing, and re-viewed fewer bits of information than college-age participants.”

    Oh and slightly tangential to the topic but related to stuff we went over ages ago, James Flynn himself has a TED talk about IQ:

    http://www.ted.com/talks/james_flynn_why_our_iq_levels_are_higher_than_our_grandparents.html

    (I haven’t had time to actually watch it yet, but I can’t imagine it would be rubbish!)

    27 Sep 2013, 3:40pm
    by Grumpy Old Paul


    Two quotes from Bertrand Russell:

    “If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence. The origin of myths is explained in this way.”

    Sounds like confirmation bias to me!

    “Many people would sooner die than think; In fact, they do so.”

    Paying off a mortgage more than pays for itself in peace of mind.

    28 Sep 2013, 5:01pm
    by dearieme


    We’ve extended ours by six years over its original life, and a grand job it’s done for us. It’s time will soon be up, however. We’re groaning under the burden of its 2.5% p.a. interest rate.

    Debt is such an irrational thing that causes such needless anxiety, trying to be clever with it is a mugs game imho.

    I got made redundant a year after taking out my first mortgage, I remember making myself ill with anxiety and insomnia. (Despite holding 50 % of the mortgage value in cash savings)

    After that little episode I recognised my nemesis and his legions of acolytes. Telling him to f’ off and take his token pound with him was a relief, although strangely enough my work ethic departed with him.

    My attitude to the usury industry now is either have nothing to do with them at all or go at it large, describe a huge fiery trail of debt and pay for none of it. Either way recognise it for the nonsense that it is and don’t give it room in your head.

    “Owe nobody any money for more than half a year”

    Totally agree, except for the last six words ;-))

    People also tried to tell me I’d be ‘better off’ not paying off my mortgage. But as some olden-day dude once said: ‘What does it profit a man to own the whole world but lose his soul?’

    Gimme soul, every time!

    4 Oct 2013, 2:50pm
    by ermine


    @all interesting how the comments show a polarisation between people who view a mortgage as a straight financial transaction to be optimised and those who see it as debt and bad in itself. I lean a bit towards the latter. Maybe not as far as Macs – I still use credit cards, though not for cashflow management but for the consumer guarantees.

    @Nathan – I’m coming round to your view with debt – go large or go home on it.

    @Ryan I found it felt very different to redeem the last £1000 (that was the minimum BM were prepared to accept and keep the account open). I did consider the option of investing the cash for a few months and it would have been a good time to do it, but I just didn’t have the guts to do it.

     

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