29 Oct 2014, 11:01am
housing personal finance
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  • Financial Foolhardiness is Forgivable in the young, not old Fogeys

    It’s perfectly understandable at 12 to want to have your cake and eat it, but unseemly after middle age. Taking an interest-only mortgage when you’re 30 is naive, but having one when you’re 60 is wilfully ignorant. The Torygraph seems to be metamorphosing from the journal of retired generals to cheerleader for those growing old disgracefully and a representative for their greedy children. So they fulminate on behalf of the wilfully ignorant

    Take your mortgage to the grave, older borrowers told

    Around 130,00 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average, according to the City watchdog. One in 10 borrowers have no repayment plan in place at all.

    It was in the mid 1990s that warnings of endowment shortfalls started going out. I know because I got one of these. So I got on the case of the endowment firm and eventually pursued a claim against them for selling a single fellow a life insurance product. But I was a dumbass, and realised this so I started to overpay the sucker! The eventual result was that this contract I had so foolishly entered to in 1989 which was due to come to the end of its term in February 2014 was discharged early. There’s a case to be made that this is a vaguely stupid thing 1 to do for an early retiree with no income for a while wanting to defer his pension, but fair enough.

    Now there isn’t anything fundamentally wrong in taking out an interest-only mortgage in your 30s as you are buying for the first time, if you expect to earn more as time goes by, or indeed spend less. From a high-level tragedy of the commons viewpoint it is a stupid thing for us to do collectively; if Help to Buy, interest-only, shared ownership and all the other methods of paying more than you can afford for a house were disallowed, or we had decent credit controls, then the market would settle at a level that most buyers could actually afford. But that’s a different story.

    So the latest that somebody could take out an interest-only mortgage without being aware that this is the purest form of renting money from a bank is probably 2000, and these are presumably people whose parents look like this

    A terribly disturbing reflection to see in the bathroom mirror for 15 years, no?

    A terribly disturbing reflection to see in the bathroom mirror for 15 years, no?

    if they haven’t jumped to the fact that they have a serious problem when more than halfway through the terms of their mortgages. If they haven’t paid off any of their capital, then they are living beyond their means, and we all know from the old boy Mr Micawber what happens then

    Result misery

    Now it is true that you get a bit more hidebound as you get older, and you become  more reluctant to up sticks and move. The human animal is a wondrous marvel of evolution/chance/creation, something, anyway. You really owe it to your forebears to honour all the work and the chances they took to create a rich, First-World country where you have many things that people used to sweat for handed you on a plate to make use of that to at least try and become wiser as you get older.

    So if you want to stay in the house you raised your children in, rattling around the empty spaces full of memories then damn well pay off your mortgage, because ownership of an asset gives you control. If you don’t want to do that, then FFS downsize, if only because that house you raised children in could be used by people of your children’s generation to raise their kids in, and you will find it more and more expensive to heat, clean and maintain unless you are rich enough to pay over the odds for your consumption.

    Speaking on behalf of the greedy children, the Telegraph asks

    Would you agree to die in debt?

    What’s actually wrong with that? Why the bloody hell not – it isn’t like the debt would be a claim upon the assets of your heirs. Obviously they don’t get to inherit anything, but there isn’t anything that terrible about this, from the deceased’s point of view. What’s wrong with it is the wider picture. If you’re of working age, no money and live in a house you don’t own  that’s too big for you then people will give you a hard time until you move or  become rich enough to afford the privilege. Get past that, even if you rent your house from a bank and not a landlord, then you are home and dry.

    We flog ourselves to tie up such a large part of our lifetime earnings in a mute capital asset largely because we haven’t worked out a better way of manage the physical assets of the world for the transitory existence of humans 2. In the UK, the renting a house option is so heavily loaded it’s a ghastly alternative to renting the money. An interest-only mortgage is a good way of getting better security of tenure, because paradoxically the 25 year terms on renting money from a bank seem to be a hell of a lot better than the six months AST terms on renting a house from a landlord. In which case why not rent the money, but the 25 year term still comes to an end one day.

    The Torygraph is wrong:

    Experts said lenders were compromising by creating lifetime mortgages which allowed older couples to stay in their homes if they promised the keys would go to the lender, rather than a family member, on death.

    However, borrowers should see the new mortgages as a “last resort”, the experts said.

    They think this is terrible because the kids don’t get to own a family asset that was never in the family in the first place. There’s nothing wrong in penalising foolhardiness in the old. Folly should have consequences. If you want to featherbed your kids and not have to move from the family home/ancestral seat of residence then FFS go on fewer cruises and pay off your mortgage, it’s not hard to understand!

    Notes:

    1. There seems to be no limit to ways a Ermine can screw up anything that involves property but I don’t regard it as a calamity and I’m prepared to pay for my folly by paying 5% on the money I borrow for a few months rather than 2% on a mortgage
    2. The luxury watch brand Patek Philippe had an ad running  “You never actually own a PP. You merely look after it for the next generation.”  The ad is absolute poppycock targeted to aspirational wannabes but could be applied to houses, or the world – anything of value that lasts longer than a lifetime. Houses in the UK can last four or five human lifetimes before they become slum clearance, so having to own the whole thing is inefficient in some ways

    Leaving ancestral real estate behind to the heirs is a PITA anyway.
    My wife’s friend has such a place her dad left her in Podunk ON. Can’t sell, draining her cash reserves to maintain it. Kids mostly have their own places and don’t want yours.
    My parents had the good sense to sell their modest home and move into a retirement spot nearly 10 years before they passed away. As an executor all I had to do was divvy up the estate according to their wills. It was all liquid assets and my stepfather’s UK heirs no doubt appreciated getting cash rather than a share of a house in the wilds of Canada.

    29 Oct 2014, 2:33pm
    by Edge of Cultivation

    reply

    Don’t be too quick to close the door on IO mortgages for everyone though. I have one myself, and I’m funnelling the money it frees up into other more profitable ventures, a good chunkc of it via my pension fund.

    To help me sleep at night, I’ve made sure that I could afford the notional capital repayments over 20 and a bit years (original 25 year term less my tenure in the place) plus interest at 10%pa if circs did change and I was forced to have a capital repayment mortgage instead.

    They are a loaded gun for the unwary, so the more stringent FCA-mandated questions I faced when I remortgaged recently are a step in the right direction.

    Totally agree though that if people can only just support their household budget with an IO at current rates, they are utterly screwed.

    29 Oct 2014, 2:36pm
    by Edge of Cultivation

    reply

    Also, I’ve seriously enjoyed your output over the past few months. Anywhere I can drop you the funds for a pint to show my appreciation?

    @Ray I’d never thought of that issue, I guess this is why we had primogeniture, which is a bit old-skool and out of touch with the times now!

    @Edge “a good chunk of it via my pension fund.” I guess you aren’t the problem then! We used to have Endowments, ISA and I believe at one time pension mortgages in recognition of the fact that building up a capital asset to discharge the principal is a perfectly reasonable thing to do. In the past the mortgage company checked, and sometimes placed a charge over the repayment vehicle.Dunno how that worked with pensions that are not assignable by law.

    The trouble is that in the Roaring Noughties we all decided to look the other way and ignore the tedious process of paying down the capital. Hell, with house prices rising so fast the value of the principal was ost in the noise after 25 years. Until it wasn’t…

    Hopefully the FCA can bring back some sense and those who can correctly use IO can be identified. Some of those special products to suit some people, just nto most people. I used an ARM loan and borrowed 10% of the house capital on a 0% credit card offer. But I was a young pup and my salary increased rapidly in the first couple of years as expected, so an ARM loan was exactly the right thing to do though the credit card was taking the mickey.

    Thanks for the prod to finally sort out tiptheweb. I’m chuffed to have provided entertainment 🙂

    We swapped our repayment mortgage to a flexible IO mortgage ages ago. All we had to do was answer (i) How do you expect to repay the capital? Answer: out of our pensions’ tax-free lump sums. And (ii) When do you expect to draw those pensions? Answer: age 67.

    It’s cleared now but had done us very well.

    P.S. “flexible” meant that we could overpay, borrow back, overpay …. ad infinitum. Very handy it proved to be.

    We switched to a flexible mortgage at 1 per cent above base rate. It has been one of the best things we ever did. The flexibility, like a cheap no-questions-asked overdraft, has been a boon. We ran the whole thing via internet banking, so just transferred cash back and forth to the current account as needed.
    And when we did acquire the capital to pay it off, well BofE base rate was half a per cent, we therefore were paying 1.5, but interest rates on term accounts, year-long BS bonds and so on, were still were still paying above 3 per cent so we kept the mortgage running and had a nice little carry trade.
    One caveat: the bank checks once a year to see if you are using the drawdown facility. If you are not, it lowers the limit. Luckily for us a helpful bank manager tipped us off….

    @Ermine, personally I have never really liked IO mortgages but, but for some people they really do work out. A couple of high-earners at MegaCorp had IO mortgages (with ludicrously low interest rates) on property in London. Given the insane rises of property prices it has, for them, worked out very nicely.

    It should be an “eyes wide open” transaction though – but for most people the value of their house (at least in the UK) will be higher after 25 years so their mortgage will be peanuts and, so long as inflation is reasonably high, this too will erode the debt.

    The problem of course is that the current environment is very dangerous: ultra-high property prices, very low inflation, and unprecedented low rates that could easily tip upwards – creating the perfect storm for IO mortgagees. If I was advising a young ‘un for their 1st mortgage – I’d definitely *not* recommend an IO mortgage!

    @all In the hands of the financially literate like you IO mortgages are fine. But in many people’s hands they are lethal. People now seem to churn their mortgages in a string of short term deals. That allows people to ratchet up their debt bit by bit – Shona Sibary couldn’t afford to have four children on her journalist’s salary, but believed she could by using her house as an ATM on a IO mortgage, until she discovered her true networth.

    I guess I’m just dirigiste enough to think that just like we limit who can fool with electricity to prevent people getting hurt, we should limit the risk-taking for the masses. IO mortgages were originally designed to run alongside another financial instrument that saved the capital (with profits endowments, then ISAs). I don’t have an objection to that, where the mrotgage provider takes a charge over the repayment instrument. It all started going wrong when that link was broken.

    It’s still shameful for old gits to pretend that it’s a surprise that the repo-man comes for your house if you’ve lived a quarter of a century IO. Young ‘uns may have the excuse of desperation and indeed growing up with unsecured interest-only, but someone in their 50s will have started out with a secured repayment strategy because that’s how mortgages worked 25 years ago – even IO ones had to have an endowment. The old fogeys have no excuse 😉

    @ermine – everyone over the age of, say 40, should be wise 😉

    […] The trouble is that it isn’t just the poor who are drunk on credit The middle classes are drunk on it and passed out on the kerbside with the bottle in their hands. Those high house prices are still there. One way of regulating credit is increasing interest rates, but there’s no taste for that because of the massive keening noise that would ensue Sometimes you should just not be allowed to do what you want to do. Now that we’ve cracked down on poor people spending more than they earn with Wonga, it’s time to move on to the overstretched middle classes in their zombie households. Their pay is falling behind inflation. Somebody should step up to the plate and stop them spending more than four times their salary on a house. And demand that they have a convincing answer for the question “how are you going to pay off the capital before you retire“? […]

     

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