Friday, 6 December 2013

When the merry-go-round comes to a halt.

In the 1960s and 1970s and before, buying a house and paying off a mortgage was not hard to understand, even if it was just as hard to do as now.  You paid your deposit, often as much as a third of the price, and borrowed the rest on a 25 year repayment mortgage. At the end of the 25 years, the last pennies trickled into the account of the building society, and the house was yours, all yours. If you moved, you took another 25 year repayment mortgage, or a shorter period repayment mortgage if you were coming up to retirement; and the same process repeated itself.  Now, you will note a little phrase several times repeated: "repayment mortgage". What that means, as most people know, is that you paid capital and interest back with a reducing balance.

But then along came endowment policy mania. Instead of paying off your capital debt, you took out a collateral endowment policy which would, if the silver-tongued salesmen were to be believed, pay off your loan after 25 years, and then some You'd be rolling in caviar on the expected profits attached to the policy.  What could be wrong? Well, it was fairly obvious what could go wrong, and no one listened. What sort of lunatic would believe that your money, taxed (although for a while it was not) and subject to management charges, fees and commissions in the hands of insurance companies, would give a better return than paying off your debts? There was a time when with mortgage interest relief and endowment policy tax relief, the gap might have been acceptable, but once these had gone, surely endowment policies would vanish?  I wonder if anyone who heard my rant about this 25 years ago will read this and reflect on how common sense is so often obscured by the greed of others.

At least those who took out endowments would have been able to pay off some or normally most of their loan by the time 25 years went by.

But greed fed the next revolution in mortgage madness. The interest only mortgage where you, the borrower were "free" to choose how to fund the bill for your original mortgage amount in 25 years.  Of course most people made no real plan for this.  "Interest only" means lower payments and more to spend on everything else. Some mortgages used to penalise people who made partial repayments.  Now the norm is to allow 10% of the remaining capital to be paid off each year.

The other change was to mortgages with incentives for a limited period followed by a racking up of interest.  The object is very simple. Every two or three years, borrowers put their feet back into the mortgage broking pool, and the fees and charges incident on this keep a whole industry of people who would otherwise strain to get a job packing shelves in employment.

So we have two toxic products.  The interest only mortgage, where the borrower has a substantial sum outstanding but no viable means of paying it off other than selling the house, and the fixed term discounted mortgage, which may be interest inly or repayment, which forces a remortgage every two or three years.

And the crunch comes when you get old. 

If I'd been out till quarter to three
Would you lock the door,
Will you still need me, will you still feed me,
When I'm sixty-four?

There is no verse about getting a mortgage when you are sixty-four, but despite Mr Osborne putting up the pension age, it's not so easy. These are problems I have come across in the last year or so affecting clients over 60:

Borrowers who wanted to port their mortgage over to another property, but who were adjudged be to be too old to be allowed to do so even keeping the existing term and reducing the loan.
Borrowers who wanted to remortgage to avoid paying a much higher rate of interest after a "discounted" period had elapsed.
Borrowers whose mortgage term had run out and just wanted to carry on with their interest only mortgage, and who had been told that they had to sell and move, even if the amounts were manageable within their retirement income.

What is perhaps most invidious about this is that these people are in the main people who have not defaulted on their mortgages over the years and have little risk thereof in the future.  I am not one to advocate wild and intemperate lending, but all these borrowers want is to carry on with what they have. Instead they are being forced to sell, or sometimes to have recourse to sub-prime lenders who are very happy to swoop down and peck away at the entrails.

At the end of the day, this behaviour by lenders is just another form of abuse of their position of strength. 

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