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.





30 thoughts on “that Interest Only Mortgage timebomb again – FCA edition”

  1. This is fab: “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.”

    I’ve actually heard before that this is why capitalism works, actually — the shocks and crisis are part of the system, otherwise old money gets the lot (as Marx would predict).


  2. As a 25yr old currently living in a tiny rented flat with my girlfriend I really do feel like im at the start of what is going to be a long hard marathon.

    The difficult bit is deciding which route to take when we’re being bombarded from every angle about whether we should rent, go interest only, go offset, go capital repayment or (in total madness) go for the government home-buy scheme.

    Its a total minefield and I have a business degree with (i like to hope) pretty sound financial ideas. I dread to think what most of my age are thinking.

    Ultimately though (And can this still be caused by Thatcher after all these years?) the desire to own my own home seems to outweigh a financial benefit to possibly renting instead.

    Ah well.. I live in the south-east where houses are going to cost a minimum of £200k. Only £40k more to save for that deposit..


  3. I’m sick of people going “I fritter my (or other people’s) money away on stupid stuff. It’s all everyone else’s fault! Pity me!”

    However, I’m also sick of the “I’ve paid in all my life so deserve xyz and the right to pour scorn over young people” mantra spouted by the aged. My generation is going to have to pay in all our life too, and we’re going to have to pay a lot more than they have.

    As for the risks of ultra-long-term compounding, here’s an interesting article about some “Methuselah trusts”. (15 mins reading time.) There’s a hilarious one in the article where the heirs inherit a massive amount of money, but can’t touch it for 1000 years! Of course, what actually happened is that lawyers ended up taking most of it…


  4. Sorry the above isn’t quite right, I’d mixed things up in my head while writing my whinge above.

    “Most of the estate was to be invested at compound interest until every currently existing heir was dead, whereupon upward of £19 million would cascade onto their distant descendants.”



  5. @Monevator one could almost argue that Death saves us from overweening Taxes 😉

    I’d say the Rothschilds have cracked the issue of preserving wealth though…

    @Reue I do still blame Thatcher. In supporting evidence renting has been quite acceptable in the UK even for people raising children in living memory – at my London grammar school more than half the middle class parents were council tenants. This was in the 1970s.

    I’d also cite other European nations – look at Germany, Austria, France, Switzerland all more renters than us.

    Thatcher did us a deep disservice with that. Owner occupation is increasingly at odds with the poor employment continuity of the modern workplace, and indeed the flipside of increased international and regional opportunities for premium staff. It was okay in 1981, but not now. It distorts and twists our economy; it ties up capital in a useless fixed form rather than getting it out lending to business, it distorts Government policy in favour of existing mortgagees as against people like you, and indeed people like me.

    There is also the cultural distortion that previous generations of owner occupiers did well, and promote housing by their tales of how it worked for them. Past performance is no guarantee to future success etc.

    They did well because prices were inflated by first the arrival of women into the workforce in the 1970s, increasing what households could afford to pay and therefore house prices, and secondly by Thatcher selling off public goods at below cost. That forced people who used to rent socially to compete to buy or rent privately. Finally house prices were boosted by falling interest raates and lax lending policies, followed by ‘innovations’ such as unbacked interest only mortgages. For you to do as well relatively as the people saying bricks and mortar are the way to make your fortune, you have to envisage something that will inflate house prices from the level you buy at in a similar way. You owe it to yourself to ask that question. The young ermine should have asked himself the same question too. In the SE, one thing that might cause such an increase is the increasing winner takes all network effect where key industries cluster geographically; all the jobs in Britain seem to be migrating to the SE.

    @Greg I hope I wasn’t pouring scorn. While I think people’s idea of buying a house in their twenties is nuts (I was 28 when I bought, which was too early, my dad was 35 when he bought). And when the time comes, and their beards show grey flecks, they will look back and see many accumulated wealth, slowly at first and then all of a sudden 😉

    It is interesting that the current rule against perpetuities seems to specify a period of 125 years

    Thellusson had “locked his treasure in a mausoleum and flung the key to some distant descendant yet unborn.”

    That gave me a chuckle 😉


  6. Sorry if my complaint about the elderly with a superiority complex came out wrong – It wasn’t aimed at you at all! Despite our being at different ends of the journey through employment, it appears to me we have extremely similar views about just about everything, and I find your views pragmatic and reasonable. (I’m not _that_ young though! I just spent a lot of time in academia before getting a real-world job when I realised how I’d be treated like crap if I stayed.)

    This is odd as I apparently have a mix of ‘right wing’ views like ‘people should take some responsibility for themselves’ and ‘left wing’ views like ‘we should help people when times are tough for them and get people who have come out on top to pay more’. To me they just seem sensible but I get the impression most people sit in one or the other camps. (Or crazy camps like “it’s all Europe’s fault” or “let’s all live in a yurt sitting about eating tofu”.)

    Heh, that’s another thing that annoys me, people who think they made their money ‘on their own’. Really? Even the most trivial of tasks relies on a whole network of people. (Another talk that interested me was this guy who wanted to make a toaster from scratch, or the story “I, Pencil”. Both bring home how much we rely on others.)

    Oh and most assured shortholds I’ve encountered either have a break clause or are allowed to lapse into a rolling contract meaning you get a stability of less than 2 months. Ridiculous.


  7. @Greg, blimey, ASTs have got worse since I had dealings 25 years ago! Oh and thanks for the magazine link, I’ve had fun there on the future series!

    I have some feeling for generation rent since I was there in ’89, and I hope people don’t get stampeded into the housing market like I was. It’s at least less dangerous now than at the high-water mark. However, some of the long-term trends suck, particularly wages falling behind, which damage the validity of the historical case for leveraged house buying.


  8. Well to be fair, in the break clause case, it is overridden by the 6 month statutory minimum, but I bet virtually no tenant knows that.

    At least it is much harder for the landlord to simply steal the deposit these days. There’s a proper scheme. Similarly, where I live, the council seem to be making an effort to improve HMOs (house of multiple occupancy) by enforcing minimum sizes of rooms & fire safety etc.

    None of that stopped me turning up to my new room which the landlord had shown me round a week before, only to find someone in it! Apparently they just didn’t have much stuff! Luckily for me I was able to secure a new place nearby by shelling out more than a grand on the departing occupant’s stuff. (He had to rapidly move to Canada in suspicious circumstances.) When I looked into suing the original landlord, it became clear that it would be a monumental hassle, partly due to him being based in NI! The CAB were sympathetic but useless. (Cutbacks meant they didn’t have anyone knowledgeable.)

    Another issue in London is that the demand for spots in a house share is so high that it isn’t worth trying to find a place more than a fortnight in advance, unless you can afford the overlap in rent. This leads to the amazingly stressful situation of flirting with homelessness!

    Not putting up with all that is probably worth the huge financial risk of owning. (Or another approach would be stopping working, spawning a couple of times with someone similar, and getting a place literally opposite for free!)


  9. @Ermine,

    I wholeheartedly agree with your comments about the British (perhaps, mainly English?) obsession with home ownership which actually predates Thatcher. What she did was to give it further impetus and sell off social housing at discounted prices. There are some further arguments against home ownership:

    a) When property is difficult to sell or prices vary hugely between areas, it inhibits labour mobility.

    b) People become obsessed with titivating their homes to the detriment of their day jobs.

    c) It tends to perpetuate inequality down the generations.

    d) As you point out, in the 1950’s and 1960’s, there were plenty of middle class and well-paid working class people living on council estates. People used to complain about “Jaguars parked outside council flats”. This social mix was actually much healthier than the current situation when so many council estates have become “ghettos of the poor”. There were plenty of good male role models for young lads and a fair number of residents who were aspirational and valued education.

    e) Massively increased housing benefit bill.

    f) Productive capital misdirected. E.g. Buy to let which is subsidised via tax relief on mortgage interest payments and other business tax allowances.

    I probably should reveal that I grew up on a council estate in North London but now own my
    own house. I bought at the age of 29 in 1979 having been badgered for years by work colleagues, friends and relatives to buy. My rationale was that I did not wish to be a tenant under Thatcher’s government whom I anticipated would strengthen the position of landlords and weaken that of tenants.

    This leads me on to think about the future, for the UK but also to imagine what I would do if I were now young, mobile with a marketable skill set.

    To address the second point first, I’d seriously consider emigrating to a stable, solvent democratic country with cheap housing
    available both to rent or buy so that I could make that choice based on personal circumstances and choice.

    So far as the UK is concerned, I’d like to see a massive house-building program to provide houses for rent with a mix of councils, housing associations, charities and
    even private equity involved in the running of the completed homes. I’d also like to see the same organisations enabled to buy repossessed properties at auction. That would be a real investment for the future.

    In the world of instant gratification, people
    have forgotten what ‘investment’ in its broader sense actually means.


  10. @GOP

    Don’t forget that if housing costs were far lower, then people wouldn’t have to save so much for retirement! (Be it paying off a mortgage or having investments.)


  11. @Greg,
    You’re right that there would be a number of benefits from lower housing costs. Yes, it would be easier to save for retirement and people would have more discretionary expenditure which would stimulate demand.

    Lower housing costs and secure long-term tenancies would reduce stress and relationship breakdowns and reduce the cost to the exchequer in “picking up the pieces” via the NHS, benefits etc.

    Re your earlier point about holding left and right wing political views. Most people buy packages of political ideas and are most comfortable with those who share their package, less comfortable with those who subscribe to another package and least comfortable of all with those who don’t buy any commonly recognised package.

    My package might best be termed ‘evidence-based uncertainty’!

    “One of my favorite philosophical tenets is that people will agree with you only if they already agree with you. You do not change people’s minds.”

    Frank Zappa



  12. @GOP
    Hah! Evidence based and politics? That’s rather optimistic at the moment, though I hope that times will change.

    You are right about the filter bubble effect. I make a deliberate effort to find out the reasoning behind views that I don’t share.

    However, having read fairly extensively and listened to things like the “BBC Moral Maze” podcasts, I have come to the conclusion that there is genuinely something wrong with people like Melanie Phillips and ultra-free-marketeers. I don’t mean that as an insult – I mean that I think they genuinely lack empathy and emotions that should be necessary to shape society.

    These people should be doing things like working out stats that would make a typical person miserable (e.g. cancer survival rates etc.) not writing Op-eds or lobbying. It’s not like we let people with no numerical skills be in charge of important things like trying to guide the economy… (Oh, wait.)

    I’ve just had a thought: are countries seemingly lurching to the right because of increased life expectancy? (This assumes that people get more right wing as they age, which is probably anecdotal.)

    Oh and one final thing. Why is it more ok for old people to be massively homophobic/racist? We pretend it’s quaint, but it’s really not.


  13. @GOP I think we are in almost total agreement on the deciciency of Britain’s housing market. Indeed I advocated for someone starting now to consider studying (another ramped cost) and then working in another EU country or elsewhere. I am not sure I can cite a

    stable, solvent democratic country with cheap housing

    . Most of Europe is out because of the hurt of the Euro. Canada has high house prices i believe but would otherwise fit the bill. I am not sure on the long term stability of the US with the increasing polarisation of both politics and wealth. Australia and New Zealand may have something to offer but I personally have no desire to live in either. However, one of the advantages of being young is greater adaptability so they could probably cope by moving if necessary.

    It really saddens me how much of Britain’s so-called ‘wealth’ is tied up in housing, where it is unproductive and immobilised. Imagine if that wealth were in the stock market or indeed in private businesses. Or even spent on flat screen TVs and theatre tickets!

    More housebuilding – only if there is a Keeper of the Commons ready to waste any politician who even thinks of selling off the commonly held housing stock to buy votes. I’d like to see professional landlords in Britain, too, not the army of accidental and amateur landlords we have still. Councils did okay in the old days. They built to the Parker-Morris standards and had maintenance teams. All that was trashed 😦

    @Greg it’s a shame that the first thing we did when households had more income is think. Hey, let’s sink this extra money into housing. But that seems to be what we’ve ended up with, in the absence of competent credit controls. People sneer at the paternalism of previous generations’ financial institutions as being too daddy knows best. But we haven’t done a tremendous job when we were handed our individual keys to the finacial kingdom. Interest only mortgages, the whole world of hurt that is credit card debt. I’d much rather have a TV on hire purchase and lose it if I fall on hard times than buy a flat screen TV on a credit card, then lose my job, use Wonga to pay the ‘leccy bill and then have their heavies hassle me. Yes, I keep my TV because the credit card firm no longer has a charge on the item, but I then lose my house eventually. Great deal – not. HP had a lot going for it for consumer debt compared ot credit cards and Wonga.

    Why is it more ok for old people to be massively homophobic/racist? We pretend it’s quaint, but it’s really not.

    Because there’s only so much effort in the world to change that sort of thing. The old have fewer years to cause damage, so we focus our effort on young and middle-aged, because there’s more future in them 😉 There’s the added issue if someone has built up views over 70 years your gonna need a really big bazooka to change them. Cost/benefit and all that 🙂


  14. @ermine As regards Canadian house prices, the average house price appreciation over the long-term works out to an increase in equity of only about 3% per annum through all the ups and downs of the housing market there. there are times to buy and times to sell, true but in the long-term you might be just as well off investing in GICs.


  15. Perhaps a combination of financial repression and inflation will pay off most of Robert’s mortgage for him at the expense of pensioners sitting on piles of cash. It’s a good time to be in lots of debt!


  16. What about a house of lords that is not elected, but is full of experts nominated by assigned bodies? e.g. Have the Royal Society nominate 15 people, the National Academy 10, etc. etc, even the CoE could have a few. (While I don’t agree with some of their views, I have a lost of time for Justin Welby, Rowan Williams et al at the top of the church as they have put a lot of effort into thinking about them and appear surprisingly reasonable.)

    Then give it some teeth so they could give some balance to a house stuffed full of people good at winning arguments but not much else.

    Oh and that’s another thing – How come the house of commons doesn’t have a massive projector so people speaking can back up their arguments with data and make figures easier to digest?


  17. full of experts nominated by assigned bodies?

    Didn’t the Romans discover the problems with that, in Quis custodiet ipsos custodes?

    Part of the problem is that there aren’t enough resources in the world to let all of us have all we want, so tradeoff in inherent in human affairs. That’s essentially a political problem. Your right to a foreign holiday at the cost of West Londoners’ untroubled sleep and breathing, our right to drive wherever we like at the cost of future generations’ usage of that oil, our demand for cheap food at the cost of damaging the land, animal welfare and future human antibiotic resistance, my right to built an idiosyncratic castle tower on my house versus the other people in my street’s right to light and a view in keeping with the rest of the place.

    These are all political, they involve a balance of costs and benefits between different groups of people in place and time.

    We do have some equivalent of your expert groups – for instance the All Party Parliamentary Group on Peak Oil and Gas.


  18. If we could start to apply psychological insights to the reform of governance in an analogous fashion to their application to investment, then we might make some progress.

    I won’t hold my breath.

    Re the input of expert opinion. Yes, ‘All Party Committees’ exist, there are government advisers and we used to have Royal Commissions. But if findings conflict with the bias of the government of the day, focus groups or certain influential newspapers, then they are usually ignored.

    In the UK, we have what Lord Hailsham termed an ‘elective dictatorship’ whereby a government with a working majority can do pretty much what they want. Back bench MPs are largely inhibited from rebelling by the threat of either ruining their chances of future advancement or the whips’ knowledge of personal and financial affairs which said MPs wish to remain private.

    A further problem is the short-term thinking of governments which usually does not extend beyond their current term of office.

    The more I think about this, the more depressing it gets. May be we need to start thinking really radically and:

    * Make some portion of state benefits dependent on educational (including vocational) qualifications.

    * Give people who pay income tax an extra vote in general elections

    * Give graduates an extra vote in elections

    * Withdraw all forms of child benefits and tax allowances/credits to the families’ 3rd subsequent children to effect only children born later than 9/12 months after the legislation is announced. (It certainly should not adversely impact existing large families.)

    * Give people a small financial incentive to vote in general elections, even if they choose to put a cross against ‘None of the above’. With elections every 5 years, that would be perfectly affordable.

    Re the prejudices of many of the elderly:

    Not much we can do about changing long-held opinions especially amongst those with low degrees of “openness”. (I refer to one of the 5 major personality traits recognised by many contemporary psychologists).
    So perhaps society has to look at putting some measures in place to provide inter-generational checks and balances. As someone in their 60’s, I fear the rise of resentment by young people against the elderly and believe that we would do well to try to pre-empt it. I have some sympathy with:

    and there was a far better article in the Telegraph 2010 blog which I can’t locate which showed the cost of all transfer payments and the proportion which went to those who were well-off.

    But nothing will happen. It’s much easier to switch off your brain and blame the scapegoat of your choice.


  19. I’ve seen a few clips of what goes on in those all party committees, (mostly from Ben Goldacre and co’s campaign on sense about science and medicine) and it comes across as democracy at its absolute best.

    There are a small group of MPs genuinely listening to experts giving real evidence on difficult subjects. However, they are still subject to the fact they are typically non-scientists and more likely to be short-termist.

    I wouldn’t do away with the above, but if there was a permanent set of people which changes needed to get past who were not afraid of statistics or Rupert Murdoch, perhaps the more stupid ideas wouldn’t get through!

    One thing I’d like to see is financial respect for jobs like carers, gardeners, teachers, builders etc. Just because something isn’t done in an office and isn’t ordering money or people around, doesn’t mean it is worth less.

    I think there is a risk of tying benefits to financial contribution into the system. Should the banker who squandered his money get more than the nurse who never could save enough?

    Much as I am irritated by the dilution of my vote by people who haven’t thought about things, I can’t see how anything but everyone having an equal say for the democratic part would work in practice. (That’s why I’d want a second layer.) What brought the problem of vote dilution home to me was when I was queueing for the AV referendum, the person in front of me literally didn’t know what the vote was for. Bah!

    As for getting people to vote, again you need to be very careful! We don’t want vote dilution. Perhaps something non-financial like while at the polls you can also enter into a lottery where the winners (e.g. two from each constituency) get a non-transferable, paid-for trip to parliament where they they get to talk to the current cabinet on anything they want? Cheap, and it would only take few days to get through everyone if they were sensibly divided into groups. In addition, politicians would get exposure to a greater mix of people?

    As for the inter-generational thing, I suspect it is just one of the many areas where people’s lack of empathy is really damaging. As an early 30’s middle class male in the south, it is pretty hard for me to imagine the issues faced by a elderly Scottish woman, but I can at least try. While my job involves sitting in-front of a computer, I did do more physical jobs before I went to university (to save for a computer) so I can appreciate why builders are always having cups of tea – they really need the breaks! I’m really concerned that Osbourne et.c would really have no concept of this.

    I admit I don’t agree with the views of the spectator post. At the end of the day all that matters is how much they take from each person. If everyone got a winter fuel allowance but the tax bands/allowances were correspondingly lower, isn’t that the same thing? The bus pass example is a particularly poor one. If the FTSE exec gets a bus pass and doesn’t use it, who has that cost? I’m assuming that the government doesn’t pay the full cost charged to the normal person – it must be scaled by usage.

    I’m coming to the conclusion that most of the world’s problems would be far closer to being solved if people just had more empathy.


  20. Greg,
    Benefits paid to people on above average incomes:

    The most interesting part of the article to me was the histogram showing the breakdown of
    welfare expenditure.

    I too can see a number of arguments in favour of free bus passes for all pensioners although I wonder if it represents the best use of government funds. I’d favour the merger of income tax and NI, abolitio of all special benefits and allowances for pensioners, and a large increase in the basic state pension which should be tied to average (or median?) earnings. No triple lock which is excessively generous when people at work on benefits have falling incomes.


  21. I’m coming to the conclusion that most of the world’s problems would be far closer to being solved if people just had more empathy.

    You want to be careful there, it’s trending towards the benign dictatorship of if everyone thought as I do 😉 Empathy comes in many forms, it’s usually selective, perhaps derived from the time not so long ago when humans lived in small tribes, not great big cities and nation states.

    @GOP I think the fellow who really nailed it on the Spectator blog was the commenter Neil Wilson

    In a correctly designed system you either have universal benefits and means tested taxation, or you have means tested benefits and universal taxation.

    The Grauniad and it’s ilk are fond of conflating the State pension with other benefits. It’s very different – because it is dependent upon contributions over many years. So it’s a contributory benefit.

    I’d like to thwack ’em around the chops each time they prosyletise the equality of all benefit spending, and it’s dear to my heart because I know someone who doesn’t get a State Pension because she hasn’t enough contributions. (and no Pension credit or whatever the means tested alternative is because she owns her own house). That’s not wrong of itself, but it is if the guardian makes the SP means tested, which is probably coming down the pike before I get it 😦


  22. @ermine,

    The State Pension is taxable. Therefore, if you have a simple progressive tax system (merging NI and income tax), there is no pressing need for even the most ardent enthusiast for wealth redistribution to argue for making it means tested as well.

    I don’t normally read the Guardian for a variety of reasons but can you provide an example of any proposal to means test the State Pension? I have read arguments (I think in the Guardian) in favour of universal benefits on the grounds that they underpin support for the welfare state by the better off. Surely people who support that argument wouldn’t be in favour of means testing the state pension.

    I’d favour the simplest and fairest tax/benefit system with the lowest administration cost possible but that’s like saying you’re against sin! Under any transition to a simpler , fairer system, especially in the current economic climate, there will be people who lose out from the changes. These people have votes and are unlikely to vote against their own self-interest. Therefore it won’t happen!


  23. He! You’ll find the biggest unions still remaining in this country prefer the complicated welfare/benefit/tax systems to remain in place as a huge proportion of their subscribers earn a living by administrating it (says he, earning a living designing the computer systems that help them administer it…)

    Any union protesting against welfare and tax cuts is in reality protesting against a diminishing subscriber base!


  24. Hi Ermine another good article, most of it I agree to, plus the comments from GOP and Greg are interesting.
    A bit anti the education qualifications to vote. Most of our MP’s have degrees etc. apart from looking after Number one I don’t see much benefit? Neville Shute, wrote a book called the 7th vote which had similar views.
    Regarding rolling up NI and Basic Tax as one?
    11% + 20%=31% for all plus keeping 40% and 50%. That should raise a few highbrows. I currently pay 20% of my State Pension [having paid 44 years contributions] so to up it to 31%. I shall have to have a think.

    I suppose there is another variation
    a] Flat rate tax of 42% on all income more then 80% of min rate.
    b] Property/Land Tax of 1% of Property/Land value. [Council Tax to be scrapped]
    To be increased each year by rate of increase using Land Registry Values.
    c] VAT to be set at 21% of all goods, but we can call it Sales Tax and levy it at the point of sale. [stops a lot of fiddles]
    d] Death duty to be at 100% of any capital left. After the first million, lets not be greedy, [but it at least levels the playing field.]
    e] Scrap Corporation tax, to be replaced with a tax on Land/Property within the UK
    f] A turnover tax of whatever the turnover is within the UK, plus an annual levy for being allowed to trade within the UK,[last done in QE 1’s reign] though I believe France did something similar to Starbucks?
    That’s all for now Ermine, my next move is to sell up, [cash in my bricks and mortar]and rent a flat in an OAP commune. As next month I shall have been in receipt of my State Pension for 7 years and a Company Pension for 27 years.
    If my plans for investing continue to bear fruit, it should last me for the next 30 years and a Card from Charles/Camilla or maybe William/Kate?
    By for now Ermine and Mrs, I have looked at her web site for recipes.


  25. Interesting piece and a not-so-gentle reminder about my own outsized interest only position. As you point out, provided you can afford an interest-only mortgage for long enough, inflation, investments (i.e. ISA’s) the pension lump sum, or some combination of these will eventually look after the capital.

    You don’t necessarily need a job for life – what do you need is enough financial stability (e.g. FU money and other sources of income) to put up with less salary where you currently live.

    The problem with Britain is that there aren’t enough houses in the places people want to live. This, together with a relatively free market leads to high capital and rental values. Other countries have a wider geographic distribution of wealth and/or more restrictive markets.

    I do wonder though if some people have interest only mortgages with no intention of paying back the capital and every intention of defaulting: at the current levels of interest and with a high LTV this would seem a cheap way to pay for housing, even including the credit rating risk. If the property value increased in value then they could just remortgage instead, take the cash and do it all again 🙂

    Yes, but you’ve got the right shoes on, some energy bars on your belt and you’ve done your training. If you can borrow some more deposit, I’d say the government scheme is effectively free money so you’d be daft to say no. Try and stretch to a two bed and get a flatmate to pay the interest while you pay the capital (or invest it instead). Or alternatively, look around, really cut your outgoings and negotiate hard for a long-term fixed tenancy until you’re ready.

    Old Paul:
    Austria apparently fits the bill. The accent can be a bit thick but if you speak German you should eventually catch on and the skiing and hiking is fantastic. I agree about house building though and I think this will start happening soon.

    Greg and Old Paul:
    Combining empathy and individual responsibility can indeed be tricky but possible. I think one way to deal with this is to re-frame the debate and deal with your local area which is far more manageable, rather than the media which deals with whole countries. On old people, there is evidence that the brain is constantly trying to save energy and one way is to reinforce existing pathways – having new ideas takes a lot of energy and is thus harder for older people who have less available. It’s easier – and sometimes fun – to be miserable, too.

    As someone in their mid-40’s who grew up in the South East, perhaps I’ve had it too easy. But I’ve also lived in other countries and the UK doesn’t appear to make too bad a job of it. Germany, for example, is slowly adopting a more UK-like property market.

    Our welfare/benefit/tax system is a disgraceful mess but unless we tackle regional disparities (and yes, other countries have these too) and build some more houses it’s not going to get much better for a long time.


  26. Another good post and some very interesting discussions! I have several degrees – may I have lots of votes please…?


  27. @GOP there’s no proposal at the moment to means test the SP. However, since it will be at least 15 years before I get at it, I don’t factor it into my retirement calculations, because I expect some hard-pressed government to do that.

    @MM – interesting angle on it. The comlexity just seems to grow and grow, as particular probvlems are addressed but adding to the general Byzantine structure. At leats you are working an exit strategy 😉

    @Lupulco – that’s an impressive track record, company pension for 27 years. Here’s to the next 30!

    @Mike I warmed slightly to IO mortgages while writing this. In particular if used intelligently to ride the financial suckout that most people experience in their 30s and 40s it has advantages, even if you don’t plan to repay the capital and own the asset at the end. However, the operative word is intelligently. I wasn’t finacially aware enough at 28 to do that as a logical decision; I followed the flow. I was a reasonably financially savvy 28 year old inasmuch as I didn’t have any debt and spent less than I earned, but still made a big hash of housing.

    For some people an IO mortgage is a way of backing a business is a wholly different matter. Yes, they never buy the house as an asset. But they are using the mortgage to buy a different asset class – an operational and hopefully profitable business.

    @Jane a vote per degree, eh, yes please. After, we are battling the forces of idiocracy


  28. @Janet, @Ermine,

    My suggestion of an extra vote for people with degrees was not driven by any certainty that the outcome would be better government but more about making a statement that education was valued.

    Re State Pension. Still doubt that it will be means-tested since that would be so unpalatable to current and future pensioners. But I expect all tax breaks and universal benefits for pensioners to go.

    My personal planning assumes it likely that
    unearned income will eventually be taxed at least as highly as earned income. At present, it is taxed less because it is not subject to NI.
    I also expect ISAs to be curtailed at some point – probably with no additional contributions being allowed after a cut-off date. Existing ISA savings would remain tax-free; cf National Saving Index Linked certificates.
    I identify benefits and tax allowances from which I gain and ask myself whether a chancellor would introduce them today if they were not already in effect. This leads me to predict which will be withdrawn in the future. But I don’t have a crystal ball and could be totally wrong, I’ll happily admit!
    And discussions of the relative merits of pensions vs ISAs are problematic because no-one knows the tax/benefit regime which will apply over the 20+ years one hopes to draw one’s pensions.


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