No more Interest-Only Mortgages from the Halifax

Every so often you come across an amazing piece of news, something that makes you wonder if people have been asleep at the switch for the last few years. Let’s hear it for the good people at Halifax, who have just woken up and decided that perhaps they would like to have some documentary evidence of people being able to pay back the money they lend to them, as opposed to just being able to pay the interest.

Uh? What part of liar loans did they not get at Halifax? Let’s hear some of the excuses for interest only loans from Melanie Bien, representing some bunch of charlatans delivering empty promises mortgage brokers:

“High-street lenders have been tightening their interest-only criteria since the downturn because they regard these loans as more risky than repayment deals. If this continues, interest-only mortgages could vanish, or become so limited in scope that they are available to only a handful of borrowers.

Interest-only loans aren’t inherently bad. What about first-time buyers who don’t have a repayment vehicle but are due an inheritance? Or someone with a modest income but sizeable and regular bonuses which can comfortably be used to clear the capital?

‘One size fits all’ does not work when it comes to mortgages. For some borrowers, not all, interest only is the right choice.”

Melanie, my dear, I don’t know if you really were born yesterday or you are thinking of your commission, but you are wrong. The tragedy is that if a borrower needs an interest only loan to be able to afford it, then an interest-only loan is inherently bad for that customer. That is because it is allowing them to live beyond their means, and they are also driving up house prices in general with the other people living beyond their means, achieving a drive-by shooting of many people’s personal finances.

There are some people that know how to use interest only mortgages. They are few and far between, and will have uncommon characteristics, like having large share portfolios and accumulated capital wealth. The sort of punter that needs Melanie’s services is not one of them, so when she says “you can afford this house if you start with an interest-only mortgage” she is always wrong.

There’s no money in it for her to say “you can’t afford that much” but the rule is simple. If you have to ask whether you can afford it, and the answer is “yes, if you go interest-only” then simply replace that statement with “Do you feel lucky, punk? Well, do you?”

Buying a house is a big commitment. It’s hard enough to rely on having a job for 25 years. If you are relying on a bonus regularly then you are playing Russian Roulette with your finances. The whole point about a bonus is that it’s a bonus, so it can’t be relied upon…

It’s really staggering that it has taken getting on for three-and-a-half years for the Halifax to realise that interest-only mortgagees aren’t so much high-risk as they are bad risk.

Let’s face it, if you really want an interest-only mortgage, it’s hardly as if the Halifax are really raising the bar that much. Tell them you will pay off the loan with an ISA, and have the presence of mind to be able to produce evidence of having had that ISA. You can always cash it in after you have secured the loan if you really want to rent your house from the mortgage company. The new rule isn’t so much documentary evidence of having a strategy to repay the capital, more documentary evidence of having had savings for a year. If you really can’t drum up the savings then borrow the money from a credit card and put it in an ISA. You would be absolutely dead-certain certifiably mad to do that, but it would probably work.*

*please, please don’t do this. Halifax may check your total credit score and see the card loan, your ISA may fall in value by the time you want to cash it in to repay the loan, there’s just so much that could go wrong. If it still looks like a good idea, back away slowly from your computer, and seek independent financial advice as soon as possible. Oh and you probably can’t afford the house, BTW…

New ISA year musings

So it’s been a new ISA year, about 10k to put in, possibly 17k if I can save that much and still avoid paying 40% tax via AVCs. In theory I should be able to do it.

I want income, which tends to mean going for steady, boring companies that make stuff that it’s hard to do without. I generally look for something that pays a dividend yield of 4.5 to 6%, and hasn’t had any dividend scares in the last few years. The latter requirement is a big ask in this post credit-crunch world.

I try not to do PEs of more than 15 (that is the long term average for the FTSE 100 ISTR).

I want to buy and then hold – if the income remains at about 5% of what I paid for the holding I am happy, though of course I hope over the long term for the share price and dividend to slowly drift up broadly in line with inflation, otherwise I might as well buy bonds.

And hopefully the volatility of the dividends, when averaged across my entire holdings, will be less than the volatility of the share prices. For holdings that meet these requirements, I aim to purchase in lumps of about £3k, preferably using iii’s £1.50 lumped dealing service. That keeps costs manageable and I don’t end up with more than about three of four stocks to know over a year.

For any major asset class if I can I would like to have at least two typical companies in the field. That is why I have GSK and AZN for my pharma holding, for instance. If I had oil I would have BP and RDSA.

The income seeking puts me in the territory of elephants. These suckers aren’t going to gallop, I am not going to wake up one day to see a share price five times higher than it was the night before. Sadly there is some risk I’ll see the converse at some time, though even BP in its annus horibilis didn’t take that sort of hit. I am comfortable with that – I am not a young pup at the start of my career trying to build my pension taking risks everywhere to try and make the annual savings lower. And I will need the income soon – within two years.

Using PE is very old-skool compared to using PEGs and CAPE and the sort of stuff described here which sounds like it should be a lot more ‘real’ – but having read the page twice I can’t understand it. I recognise some similarities with this approach which I can sort of understand. My shares universe is small, limited by my requirements and so I accept the imprecision of my tools, as long as I generally get results that work for me in terms of steady dividends of about 5% of my original stake then fine.

I would far prefer to use use investment trusts for income, particularly as I could use the smoothing where I am particularly exposed in trying to live off my investment income in the two to five-year time-frame. But I don’t buy those at a premium and unfortunately that seems to be the way things are for the equity income trusts I am interested in, Mr Market is in an overly bombastic mood on that front. I hate doing the grunt level work of dealing with individual holdings, but needs must at the moment.

In doing this, I am making an implicit bet that the financial system can preserve wealth across the years. My worldview is such that I think there is a serious risk of that assumption failing dismally. That is why I have non-financial investments. I therefore accept that there is a small but finite risk of my entire financial holdings being destroyed if the financial system is overwhelmed by a black swan event. More likely, it will be overwhelmed by the terminal challenge to the fundamental axiom of capitalism – the need for continuous growth. That challenge will come as oil becomes more expensive year on year as it becomes harder to extract. Yes, we may head it off with thorium reactors or solar PV. Well, maybe not the latter, solar PV in Britain? You must be joking, and David McKay says it can’t be done.

So, how should I play this? Well, I have bought some shares for about 3k from this year’s ISA. The rest I will hold as cash for a little while, as I am hoping for some buying opportunities when:

• Greece finally takes that razor to the bond markets and reinstates the drachma.
• Ireland at least restructures the debt, though the days of the punt must have some fond memories in Dublin.
• The Portugese escudo returns

I figure 2011, probably the second half, holds a good opportunity for this, wich should hammer share prices.

Then, of course, there’s the Big One. If that blows, it could shatter the financial system, but if it holds then the levels of fear and loathing stalking the Western world will be truly awesome to behold. We won’t be able to tell night from day, or who or what to trust to store value.

That Big One is the dollar’s reserve currency status being revoked or usurped. The world was dumped on from a great height when John Maynard Keynes’ Bancor was switched for the US dollar at Bretton Woods.

If that happens all bets are off. I don’t know if any currency will hold value, or if when the kingpin is pulled out the whole system will fall apart, the falcon will hear the falconer no more and the numbers will drop from my dealing screen like the opening credits of The Matrix. OTOH there may be money to be made in the confusion, as well as a good deal to be lost.

Sooner of later the world will wake up and realise that the conflicts inherent in having a national currency as a reserve currency are toxic, to both the nation and to the world. It is moral hazard writ large, an invitation to run a continual deficit at the expense of everyone else.

However, to start off with, a jolly good Euro crisis should be more than good enough to paste the stock market and improve values!

PS Since writing this it seems an update to Monevator’s HYP is on it’s way. Which hopefully will inform my thinking on this. I hadn’t expected to have to use individual shares in a HYP, as I had anticipated using income investment trusts. Unfortunately they are poor value at the moment because they are trading at a premium, presumably because everyone else is chasing investment income at the moment because of the atrocious return on cash.