The trouble with a HYP strategy now is everyone else is trying it too. Cash is still evil…

A few years ago I decided to follow a HYP strategy. I read this, and in particular I liked

But there’s a way of profiting from holding shares that requires no selling at all, by receiving the (generally) twice-a-year dividend.

So I did it. And am still doing it. It gives me a yearly yield of 5% p.a. on my purchase cost and capital appreciation which more than compensates for inflation, indeed at the moment this is faintly ridiculous. That is due to the disgraceful activities of the Bank of England flushing away the national debt by debasing the currency combined with some hint of animal spirits returning to the business world. So far so good. I have two problems now, both good ones to have in some way.

A HYP is not the approach to take at the moment because everyone else is doing it

This doesn’t hurt what I have already, because the yield I earn is the yield on the price I paid. The problem is everyone else is bidding up the price of the shares so it makes it harder to find value.Some would advocate taking the profits and trading the portfolio but I’m not going to do that because this is not how a HYP is meant to work and I have no skill as a medium term trader 😉 I will sit on my backside and take the divi, indeed I have managed to avoid selling anything this year other than that mandated by iii’s change in funds policy.

A first approach is to look for diversification in areas that are out of favour – I have no oil or mining stocks and could do with some for sectoral diversification. Both of these sectors haven’t been on the roll that everything else seems to have been on this year. I also don’t have the religious objection to tobacco many people have either. I’ve avoided all these sectors because I don’t understand them and when I constructed my HYP they were highly valued. If there were a sector index fund on these areas I’d consider going that way.

However, at the moment I am suffering from a combination of RDR paralysis and the fact that everyone else seems to be destroying the opportunities in what used to be a quiet and tedious investing backwater in a search for yield. So maybe it is time to sod off and fish is some quieter backwaters.

The FSCS compensation issue

The second is that my ISA will cross the FSCS compensation threshold this year even if I leave it alone, and it will cross it sooner if I contribute this year’s 11k allowance. Even worse is that I have about half as much again in an unwrapped TD account, which I used to flush out my sharesave and ESIP holdings. I didn’t want a large unbalanced holding of The Firm’s shares so I took a share certificate for half the holding, which I will sit on and take the dividend thanks very much. The other half I moved to TD, and sold some to crystallise capital gains, which I converted into a Vanguard developed world exUK index fund and a Vanguard EM index fund. I have more than enough UK exposure in my ISA, so the Dev exUK was to balance that out a bit, but the aim of the exercise was mainly to cut down the exposure of having half my shareholdings in The Firm.

A share certificate is a good way round the FSCS issue – I have a direct holding in The Firm and there is no nominee intermediary to worry about. However, you can’t hold an ISA that way so I have to deal with nominee accounts. Having both ISA and regular nominee accounts with TD was a tactical mistake I didn’t appreciate at the time. The FSCS compensation applies to each company, not each account, so I am already way over the top. The obvious thing to do is to move the trading account.

However, at the moment there is loads of confusion in the UK shareholding nominee platform arena due to the change in regulation of funds, called the RDR. I have already taken one hit from the RDR last year. For this year I am going to sit tight, accept the risk of TD Direct going wrong, which I think is low. If there is general stock market mayhem in some ways the FSCS compensation limit of £50k is self-correcting, as a jolly good stock market crash will automatically devalue the holding – a serious market crash can halve the value of a portfolio in a year which would get me below the protected amount. So TD going bust due to a stock market crash isn’t the problem, it is them going bust due to an internal thief or management incompetence. I should add that I have no reason to currently suspect either, I’m not saying that they are a bunch of incompetent fools, I am merely considering the risk 😉 We have seen in 2008-9 that financial institutions that look solid are often built on sand these days…

Cash is evil…

Still a particularly rotten asset class. It makes me sore that my AVC fund is in cash because I will pull it in about year from now. The Bank of England’s destruction of the pound will have rotted the real value of that by about 10% compared to when I left work. Okay, so I avoided paying 40% tax on it, so in the round I am still better off than where I started, but that needs to come out and start working for me.

I also hold cash because at the moment I am living off savings and that is decaying under my feet. This was highlighted recently when a three-year NS&I Index-linked savings certificate rolled over. It started out a £1000 and rolled over at £1,162, ie in three years the value of money has fallen by 16%. I at least have the benefit of being so poor (okay, hold on the strings and violins in the background, guys) that I don’t pay income tax this year and next, so I filled in my form R85 when I switched my Nationwide Flexaccount to a Flexdirect account. They will give me 5% on £2000 if I play stupid games shifting £1000 back and forth between that and my main bank account each month. With R85 I get to see 5%, too 😉


I also joined Zopa, though unlike others I consider this bordering on mortgage-backed securities in terms of risk, so I only put into it an amount that I can afford to lose 100%. To see what’s wrong, we only have to look at the current case study.

And borrower Jonathan is no exception – he used his loan to buy a splendid engagement ring for Charlotte, his girlfriend of 8 years

Jonathan, me old bean, you have been with this lady for 8 years, and you’re getting married. I’m really happy for you and wish you a long and happy married life. However, despite it making me look like a hard-bitten unromantic old git, a quick word in your shell-like.

Is it really such an illustrious start to your married life to go into debt for the ring, which is a consumer item, this isn’t an asset that reduces your long-term costs or makes you money?

My father saved to buy my mother a ring. My grandfather did for his wife. Getting married is a very large transition in your life, and doubly so on the financial front if you are planning to have children. You really, really, don’t want to go into debt for any aspect of getting married. If debt is the answer, you can’t afford to get married, or your wedding plans are too extravagant[ref]it’s come to my attention that there is a whole wedding industry whose raison d’etre is to make sure newlyweds start their married life in as much debt as they can persuade them to go into. On the ads they say getting married is all about the wedding and the honeymoon. For crying our loud these good people state that

Your wedding day should be the most romantic and memorable day of your life

I guess what they’re really saying is it’s all downhill from the end of the honeymoon, eh 😉 When you look at people who have been married a long time they didn’t need some ghastly extravagance to get married. It was about each other, not about their consumer purchases. If anything, going into debt to get married is more threatening to the  relationship than not having an expensive wedding in the first place. Get your priorities right – being stressed about owing money is no way to start a life together if you can avoid it.[/ref]. Save up for the expense, because, to be honest, if you do end up having kids, this point is probably about as good as it gets for a little while on the disposable income front. So, Jonathan, if you are borrowing to buy her a ring, particularly after having had 8 years to get ready, then you have just passed a great big red “Wrong Way, Do Not Enter” sign. And you, sir, need to sort your financial shit out and understand the simple principle. If it’s a consumable item, never, ever, borrow money to get it unless it saves you money. A house is a consumable item – the only reason you go into debt for it is because it stops you paying rent[ref]not paying rent is not a great thing in itelf if you have to tie up a load of your capital in an illiquid asset like a house. There’s nothing fundamentally wrong with paying rent, if it costs you less than you’ve have to invest in buying a house and all the ancillary parasitic costs of home ownership.[/ref]. Now what is the ongoing cost that Charlotte’s ring is saving you paying out every year? Zilch, thought so. So you need to man up and save for that sort of thing in future. Or do without.

What Zopa needs is an ermine behind a leather-covered desk with a banker’s lamp on it. When people come in to borrow money, the ermine will ask them some pertinent questions about what they are going to buy with it, to the effect of:

How to decide if borrowing money to buy it is a good idea
How to decide if borrowing money to buy it is a good idea

It’s notable that this accounts for something that we are very reluctant to acknowledge in the developed world today. That sometimes people have needs that they cannot afford. I have had the experience, and it’s a bastard. But it isn’t necessarily up to Them to fix that for you, sometimes you have to spit on your hands, roll up your sleeves and get to dealing with the issue at hand. Or, heaven forbid, do without some Wants so you can afford your Needs…

The decision process for purchase of consumables would be slightly different if I were working for Zopa, because it would come down to whether I believe this punter is fool enough that I can get the money out of him with my heavies as opposed to the heavies used by the other guys he’s likely to borrow money from. However, though Zopa try and make out all cuddly with their Valentine story and all smoochy smoochy aaah ain’t it luvverly, in the end they are highlighting a fellow who shouldn’t be using Zopa for that purchase. Not because it’s inherently and deeply wrong for him to borrow money to buy his girlfriend a ring, rather than, say, a motorbike, or a holiday, because at least the ring is durable and hopefully gives them joy for years to come. But because he should have been saving for it over the previous 4-8 years, after all it was a reasonably foreseeable expense. Put another way, Jonathan has just chosen to buy £85 worth of ring for £100, because he wasn’t able to foresee this purchase, and he’s paying 5% over 3 years for the pleasure of not looking at the road ahead.

Now if their disposable income is always going to be more than their living costs then so what, I have addressed that option in the decision tree. I have borrowed twice in my life to buy a consumer durable.  The first time was the wisest, though it didn’t look that way. When I started work and was living at home I borrowed 20% of my gross income to buy a secondhand preamplifier, on 0% interest free credit. I paid every instalment from income, just before time, and recently I had to fix this preamplifier – it is still in service after 30 years. In the round it was a stupid thing for a 20-year old to do it, but if you are going to do stupid things then you should do them wisely and not pay over the odds for it, 0% is about right 😉 The second was a personal loan to buy a car off a family member as they were changing it, which I discharged in six months, another piece of moderate folly in my twenties, but I ensured I could pay the loan before applying for it, which seems to be a detail a lot of people miss these days.

Maybe the grizzled form of my future Self is in the process of building a time machine to go back and have a word in the ear of the young Ermine, because I stopped borrowing money to buy consumer durables after that, with one ghastly, stupendous and horrific exception, buying a house. By staying put I passed the criteria of the first box, but only in retrospect. I even borrowed my deposit for that on a 0% credit card deal, but at least I didn’t lose money on that, because I paid it down before it fell due.

That’s the long story of why I don’t trust Zopa at all, and will probably limit my exposure to that to my original stake. They lend money to people who shouldn’t be borrowing it for the purpose they’re using it for. I took a butcher’s hook at what my borrowers were borrowing for

  1. Car
  2. home improvements
  3. consolidate debt
  4. car
  5. other
  6. car
  7. car
  8. home improvements
  9. consolidate debt
  10. wedding expenses (total of £7500! though only £10 from me, thankfully Yikes!!!!)
  11. Consolidate existing debts
  12. car
  13. car
  14. car
  15. Car
  16. consolidate existing debt
  17. car
  18. car
  19. car
  20. car
  21. car
  22. home improvements
  23. holiday (£5000, jeez!)
  24. home improvements
  25. car
  26. motorbike
  27. car
  28. car
  29. caravan
  30. home improvements
  31. car
  32. car
  33. consolidate debts
  34. home improvements
  35. home improvements
  36. car
  37. car
  38. home improvements
  39. consolidate
  40. home improvements
  41. home improvements
  42. car
  43. car
  44. consolidate debt
  45. car
  46. car
  47. car
  48. consolidate
  49. car
  50. car

Now if you look at this lot it’s a fairly sorry story. Why are so many people over their 20s borrowing to buy cars, FFS? There are people my age at it, you are actually meant to learn something as you go through life. A car is a known running cost – they wear out and break down after you’ve had them for 10 years, so when you buy one you start saving every year 1/10th of the price so you have enough to get the next one. The price of secondhand cars actually drops – I paid about £5000 for my last one, a VW Golf which I had for 13 years. I could get a great s/h car for £5000 nowadays, and £5000 is worth less now than it was 14 years ago. I’d probably look at paying less, because to be honest I just don’t need £5000 worth of car.

zopa loan purposes
what people are using zopa loans for

We have 8 debt consolidators in there. These guys aren’t going to pay that back – if you’re borrowing money to service debt you are in deep shit and going deeper. I hope the girl who’s borrowing £7500 for her wedding won’t have the shine taken off her marriage by the stress of paying that lot off. The summary is scary, because only the home improvements one would pass the Ermine’s beady eye in the test above, and that is for improvements, not Changing Places fun and games or new carpets because you’re bored with the colour of the old ones. Not if you’re borrowing money to do it, because that is telling you that you are living above your means. I have some sympathy for the people in their 20s – stumping up the money to buy a car to get to work may well need borrowing money. But there are a lot of people whose age indicates they should have got out of that stage…

I feel a lot better about lending the Nationwide cash at 5% than doing the same for Zopa customers. And yet Zopa seems to have a strong following in the UK personal finance community. I have to say that if I were these Zopa customers’ bank managers I’d give most of them short shrift 😉 I’m sorry, but if you are over 50 and borrowing money for a car then you need to start buying less car. Mr Money Mustache gives it to you straight between the eyes in his usual inimitable style. Basically you do not need a pickup truck, and SUV or a people carrier to drive to work or take the kids to school.


Monsanto GM – Imagine a boot stamping on a human face. Forever

Many people have an issue with genetically modified organisms from a gut feeling and philosophical point of view. I used to take that line, but I don’t any more – the good people of the United States have been willing guinea pigs for the GM experiment over the last 20 years and it’s been in general not hazardous to human health[ref]It has indirectly been very bad for some Americans’ health, by making it cheap to raise industrial beef on feedlots and by putting high-fructose corn syrup into all sorts of low-grade foods. However, Americans have the choice whether to eat these or not, this is a social and business problem that has been facilitated by GM but not caused by it.[/ref]

But I am opposed from an economic point of view, and this story of Monsanto suing a farmer in the United States is why. It reminds me of a quote late on in Orwell’s 1984

But always — do not forget this, Winston — always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face — forever.

Much of what is wrong in industrial agriculture is the desperately overleveraged capital structure of farming in the West. Farming owes so much money to banks to raise the cash for the complex web of seeds, chemicals, machinery that they can’t take any risks and have to maximise production, purely to pay off the debt incurred.

Now on the face of it, it’s an open-and-shut case. Monsanto patented their seed. Farmer Bowman buys a load of soybean seed from a bunch of guys selling it as feed, and then he goes and plants it as a late crop. Since 90% of soybeans in the US are GM roundup-ready, this is largely second-generation GM. Bowman doesn’t have any alternatives not encumbered by Monsanto’s patents. And so Bowman has Monsanto’s heavies roll up demanding protection money lawyers appear threatening to sue the shit out of him. Which they do.

One of the most convincing proofs that there is no God is that at Monsanto’s headquarters the sign doesn’t get to look like this

what about the 4.5 billion years of R&D before you, Monsanto?
what about the 4.5 billion years of R&D before you, Monsanto?

The problem I have with GM is that it means evil shits get to own most of our food supply. These guys put it well, though I don’t personally subscribe to the Monsanto makes Indian farmers commit suicide theory[ref]Even in India I don’t believe cotton is the first link in the food chain, unless they’ve found a way of reprocessing it into something edible[/ref]. Monsanto should be indicted for its own patent and legalistic evilness 😉

Control over seed is the first link in the food chain because seed is the source of life. When a corporation controls seed, it controls life, especially the life of farmers.

Now if I have a problem with some company, say Sky TV for example, or Rupert Murdoch in general, then guess what? I don’t have to buy their products! Giving up eating, however, isn’t really an option.

However, Monsanto’s express aim in life is to seize the means of production through legalistic shit like patenting the very stuff of life, and then extracting protection money. They do that by creating an unsustainable business model that gives a sugar rush of profits at the beginning, which is the hook to get farmers dependent on a highly leveraged business model. Borrow the money to buy our seed, and you can drench it in Roundup (made by Monsanto, funnily enough), and make enough profit to pay us back. Rinse, repeat, recycle. But don’t you dare plant that seed, else we will sue the living crap out of you.

In itself that was not so bad. What is bad is that as soon as there is any Monsanto GM in, say a cross between Monsanto crop and a neighbouring farmer’s crop, then Monsanto assert their rights over that other farmer’s crop, and say his seeds contain Monsanto patented information, Monsanto therefore forbid him planting his seed or want their payment. That’s the bit I have a problem with. Basically, if Monsanto want to take that line, fair enough. Let society then make a stipulation on Monsanto in return, to prevent the company stamping all over the rights of third-parties to mind their own business. Something like

Okay, Monsanto, you want to assert patent rights over descendant crops that may have been contaminated. Fine. In that case, we attach the following license conditions to you being able to sell your GM seeds to farmers , to the effect of. “All GM crops must be plated under condtions of biosecurity, in negatively pressured double-skinned polytunnels that are sealed against the egress of your damn precious stuff, so it doesn’t pollute the environment or infringe the rights of other people not to use Monsanto products”

Patent law is fine when it comes to human constructs and inventions. You don’t normally leave a television set or an iPad in a room and come back a year later to find they’ve introduced iPad technology into the light switches, the wallpaper shows eulogies of Steve Jobs and doorknobs speak to you like Siri, while the gravel in the drive can tune itself to BBC1. However the whole point of Life is to reproduce and spread genetic material, and it’s been doing that for three and a half billion years. Self replicating structures are inherently incompatible with the exclusive rights of patent law, and it’s high time that humanity in general took the fight to Monsanto and educated the piss-taking bastards that their abuse of the patent system needs to stop. There may be a case for GM technology, but the case for it is to be done in national research facilities or universities[ref]Companies welcome too – some firms make a profit on open-source material and it would be unwise to prohibit the private sector just because one example became evil. But if you even think of patenting Life then we will bulldoze your buildings, take every red cent in your accounts and debar every member of the Board from running a company ever again. Because you have shown yourself to be greedy bastards who want to control our food supply, and steal the work of over three billion years of painstaking research and development that has claimed countless lives on planet Earth. They didn’t all die for your monopolistic profits.[/ref]. Oh and the patent system needs to be updated to include the fact that Life has over three billion years of prior art and therefore no living forms whatsoever may be patented. I assume that Monsanto has already tried to patent the wheel, but didn’t manage to get that one through.

Unfortunately in the UK we are about to lose the GM battle, because:

We had a pro-GM lobbyist Caroline Spelman as an Environment minister before she was sacked.

To be replaced with Owen Paterson, who says people who don’t like GM are humbugs, and if we don’t have GM in Europe WE WILL ALL STARVE. Yeah, right.

Presumably Monsanto and its ilk have bought enough of David Cameron’s guys to get their way. Everybody has their price 😉

Part of the problem is that Monsanto does deliver real value for their customers in the beginning, just as a drug dealer does. All the wins are at the beginning, when you switch a diverse but sort of sustainable agricultural model to a closely controlled monoculture aided by broad spectrum herbicides. Yield goes up, what’s not to like? The problem, just like with narcotics, is that to take the wins, you get locked in. To afford Monsanto’s seed prices every year, because you aren’t allowed to save and replant, you have to borrow. And to service the debt, you need the higher yields, to earn the money to pay the debts, so you then end up in debt-slavery. This is not unique to Monsanto, it is the problem for a lot of modern farms, in that they are extremely capital-intensive, thus so highly leveraged that the financial structure of farming becomes brittle and non-resilient. You coin it in the good times, then use the money to consolidate more and more holdings into huge farms with dearer machinery, becoming more and more leveraged in the process.  So when a bad year comes, like last year’s endless summer of rain in the UK, you get financially slaughtered and need to borrow even more money. Which leads to short-termism, which is a bad thing in farming, because you no longer look after the land, using the soil as a growth substrate and fertilising artificially, rather than working with the natural carbon and nitrogen cycles. GM seeds break another natural cycle, though seed saving has long gone from Western agriculture and horticulture.

Even in the 1960s the majoriy of corn and sugar beet were F1 hybrids, ie purchased anew each season. The unique thing Monsanto brings to the mix is they are using the expensive process of GM to get themselves to sole supplier position with a dead hand on competitive alternatives. It is the rent-seeking nature of a monopolist that makes the company so dangerous, when combines with monopoly control of the essentials of life.

Shame about the absence of that fiery hand writing on the wall. It would make terrific TV, and would be a really stylish launch for the Second Coming 😉

The joy of observing the quotidian…

The philosopher G. I. Gurdjieff was of the opinion that most humans live their lives in a state of hypnotic “waking sleep”[ref]I’ve somewhat brutalised his philosophy for the sake of pithiness, more at the Gurdjieff society, Wikipedia,[/ref] ; one of the aims of a life well lived was to snap out of it and wake up. One of the simple joys of being retired is to be a little more aware of the world, to take the time to wonder a little more.

Perhaps work did that hypnotic sleep thing for me, the routine dulled the senses, it’s still a little bit sad to think of the wasted years of consciousness. Now, even in observing the quotidian, I wonder if I just missed stuff in the real world. Some of the greater awareness almost throws back to childhood times 😉

I try and do is get out and wander around the immediate area every day, I’m lucky in having a few quiet streets with a rec and a cemetery nearby, places where I can observe Nature going about it’s everyday business. At the moment the walk is livened by the lovely sound of blackbirds in full song.

Is there always such a profusion of dandelions at this time? Is that just something that happens at this time of year and I never noticed, because I was too busy looking at screens than at the Real World™? How did I miss that for 20 years…

This is what happens if you don't dig 'em out of the lawn
This is what happens if you don’t dig ’em out of the lawn

I thought of the fellow above whose ‘lawn’ I pass every day, as I dug my own Löwenzähne out of the grass. The German word for dandelion is ‘Lion’s teeth‘ translated literally, a more poetic term. If they didn’t spread like crazy (see above) they’d be attractive flowers in their own right.

Not so much pushing us daisies as pushing up dandelions
Not so much pushing us daisies as pushing up dandelions
They look quite pretty...
They look quite pretty…

Gurdjieff was right. How did I miss this minor spectacle for 20 years? If this kind of living on automatic pilot only made me miss this sort of thing then it’s not the end of the world. But drifitng through life means we live by other people’s values, standards and agendas. That isn’t a way to lasting inner peace. Thoreau put it well

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away.

Thoreau, Walden

Some of those values and agendas are buying stuff because it makes other people richer, not because it delivers inherent value for you. It’s a bittersweet tragedy that working, which enables you to earn more money to buy more Stuff, steals away our consciousness at the same time unless we are unusually vigilant and alert to the distant drummer, and so we spend more of what we earn on Stuff that doesn’t always deliver value for us.


that Interest Only Mortgage timebomb again – FCA edition

How did you go bankrupt? Slowly at first, then all of a sudden.

I once heard a father tell his son “There are a lot of stupid people in this world”. And if the FCA really is right that many people don’t realise that an interest only mortgage doesn’t buy the house, then they fall into this class. It’s in the name – interest-only. As opposed to repayment mortgage. Y’know, the one where you repay the amount you borrowed. Duh…

Here we have Robert, a fellow 18 years away from the end of his interest only mortgage. He is surprisingly savvy about his plight, having been aware that in the past you would only be allowed to get out of the door with an interest-only mortgage if you had a parallel savings product for the capital. Often an endowment, but a S&S ISA is a good match too. If you save £10k a year in cash, after 25 years you would have enough to buy the average non-London UK family home. 25 years is long enough for the stock market to give you a decent stab at getting ahead

Framing, dear boy, framing.

Listening to Robert, one of the things that struck me was that for some people, an interest-only mortgage could actually be a very good idea, even if they know they will never pay back the capital. In Britain, a lot of renting is on assured shorthold tenancies, where you can be kicked out of the place every six months, even if you comply with all the conditions of the tenancy. A lot of people want to have children, and for that they need to have a house bigger than the one they will need as empty nesters. A 25 year interest only mortgage is a good match for that situation – it’s long enough to raise a couple of children to maturity, and when the time comes at the end, hell, sell up before the time is due, pocket the nominal profit that 25 years of inflation will give you plus anything house price inflation gives you, then rent or buy your empty nest.

The pros are

  1. as long as you pay your mortgage, nobody gets to kick you out of your house.
  2. You can paint the walls, do DIY,
  3. there won’t be a succession of landlords trying to run off with your deposit, move you on etc.

You will never own the home and never plan to – because it’s too much house for the one you will eventually own or rent. As a way to use other people’s money to pay for the extra space you need to raise children, it’s a good deal, as long as you can dodge the cons. You are renting from the bank, but as long as you know that, it’s fine.

The cons are the three big ifs.

  1. You need to make sure you always have enough coming in to pay the mortgage, up until the time you sell.
  2. You need to make sure you have a job for life so you won’t have to move to chase work, or live somewhere like London or pehaps Cambridge where there is lots of work around so you can find alternative work without moving
  3. You need to stay together with the person who brought the children into the world with, and quite frankly from observation I would not say having children always improves the stability of people’s relationships, but hell, what do I know 😉

The modern world has become a lot more inimical to the chances of success at dodging the cons, and you have to dodge all of them for 18-20 years to make a go of this. I wouldn’t bet on it, if I were starting out now.

One of the toxic legacies Thatcher left us was the notion that owner-occupation was the only proper way to inhabit a house in Britain. It runs deeply through the British psyche, and leads us to overpay for housing. Other countries rent happily, even as families. Generation rent may want step back a little, and reframe its thinking

  • You can now work and study in other parts of the EU. You may be able to save yourself a shedload of cash at the further education and the home ownership stage for the cost of learning a foreign language.
  • The EU is not your only choice, though you may have to jump through more hoops.

Back to Robert. He is being a complainypants and has surrendered agency. He has 18 years to go. Inflation kills your money, roughly halving its real value every decade. 188k sounds like a lot of money now, but it will have a value of only about 47k in today’s money by the time his mortgage falls due. Now I appreciate that’s still a lot for a gent with £6.86 of savings, but in practice it means he needs to save in real terms about £2600 a year in today’s money, about £200 a month.

That is tractable with frugality. He needs to buy less consumer shit, stop going on foreign holidays, and tighten his belt. In particular, if he starts to pay that off, it will reduce the amount of interest he needs to pay, resulting in a virtuous cycle. The tragedy with a mortgage is that it always looks darkest just before the dawn. I never believed I would be able to pay mine off when I started getting the letters saying my endowment was going to fall short. But unlike Robert, I sucked my gut in and started to hit the bugger by overpaying it. And it got easier. It got a damn sight easier when I won a mis-selling complaint and lobbed the entire amount into the mortgage.

In Hemingway’s The Sun also Rises, one of the key characters, Mike Campbell, is asked,

How did you go bankrupt?

His response is

Gradually … then suddenly.

Now normally I am of the opinion that Tom Peters is full of shit, the sort of thing that he has advocated for business is one of the reasons I couldn’s stand working any longer for stupid pricks bean counters that knew the price of everything and the value of nothing. However, he is a genius, simply one misusing his talents in the service of the forces of darkness IMO. One of his acolytes posted thusly

This is so very applicable to a recession scenario. Actually, it is applicable to all our lives—you don’t fail suddenly; you fail gradually through a series of small failures everyday. The day you fail is just a culmination of all the small failures you have had.

There is a little known corollary of this observation. It can be reversed too. Let me postulate Ermine’s Law

How did you succeed?

Gradually and imperceptibly at first, then all of a sudden.

Take it from an old git, because unfortunately you don’t tend to have this experience with finance before late in your forties unless you are exceptionally skilful. It’s why the halfway point of any long term goal is such a dreary and dismal hopeless place. The foundations are of success laid gradually, but the success happens all at once. Look at this graph of how a repayment mortgage repays the capital. You’ve put all the work in steadily, but you’ve only bought a third of your house at the halfway point.

how a traditional mortgage builds equity
how a traditional mortgage builds equity

which I cited in this post. Look how the capital rushes up towards the end.In practice remember that inflation is halving the real value of the cost of your mortgage every 10 years. so not only is the experience really horrible at the start where money is short, but towards the end you can pump up your contributions. That means the all of a sudden effect is even more marked if you have an interest only mortgage like I did and start making capital repayments as you get later into your working life, when the mortgage becomes a smaller proportion of your disposable income – see my case below. That’s the tragedy with saving steadily – you see bugger all for years and it’s hardest in the beginning, then suddenly it all happens – when you don’t need it because you have more money coming in. That’s why the greybeards have all the money in the world – because they’ve been saving a little bit for all their working lives. Death was invented by economists to save the human race from living in servitude to our Stone Age ancestors, some of whom would have been saving for thousands of years and would own everything 😉 That’s why every young generation feels it unfair that all the old gits have the money. I felt that way too in ’84… You’ll get there – if you don’t spend it all and if you don’t inflate your lifestyle with your income like all the admen on the telly say you should.

As another example, take a look at my mortgage and income history, in relative units. Look at that shocking income multiple of 5:1 at the outset – and I was a bachelor at the time, so it was just my income paying this, and I got to see interest rates of 14% p.a.! Buying a house at that time was such a stupid thing to do – it’s even worse than the price to earnings multiples now prevailing, and interest rates are lower now. Again, look at the trajectory – slowly at first, then all of a sudden.

an ermine's inflation-adjusted income and mortgage stupidity
an ermine’s inflation-adjusted income and mortgage stupidity

Robert needs to get a grip. First ask himself it it makes sense to own his house in a couple of decades. If it does, then make the adjustments to his lifestyle to fix that. I see he has a very nice flatscreen TV and nice new leather sofas. I don’t have these. But I own my house. You pays your money and you takes yer choice. Robert needs to do less consumerism and more saving if he wants to own his house. He’s got 18 years to go. He has the choice – adjust his financial flight path and land safely. Or have a fast ride, lots of holidays, cars, TVs and leather sofas, then crash and burn. Interest only is not a timebomb in his case unless he makes it one. The FCA is quite right to be educating interest only mortgage holders that they are on , duh, an interest only product. However, the “I want it all now” mentality and general complainypants attitude means they’ll be wasting their breath. If you take out an interest only mortgage and are surprised that you won’t own the house at the end of the term then you shouldn’t be licensed to drive a £10 note down to the pub, never mind sign on the dotted line of any financial contract.