Paul Tucker, outgoing deputy Bank of England governor, summed up an essential truth about debt[ref]It’s a shame I can’t second-source the original quote. If Philip Aldrick made it up, he’s wasted at the Telegraph[/ref]
“When we are a lender of last resort to a bank … we take the institution’s soul. And we say we will give you back your soul when you’re healthy and I get my money back,”
It’s not just banks. It’s any borrower – they swap a little bit of their financial soul for the use of the money now. It’s why I paid off my mortgage, despite knowing the most rational way to maximise my financial position would be to pay it all down bar £1000 and invest the residual amount. Wherever I hear someone who is financially aware and getting ready to pay that mortgage down, I’ll often try and highlight that alternative for consideration. The analytical case for keeping it is best made here, so I won’t bother trying to state it, but it is compelling, particularly for anyone under 45 IMO.
For me, my soul was worth the opportunity cost. The dead hand of the lender of last resort is symbolically powerful. The lender plays the part of Mephistopheles to your Faust – they have access to resources you don’t have, and will lend them to you. On one condition – they take a charge over part of your soul 😉 Where Faust screwed up was accepting a charge on his immortal soul, but if you borrow more money than you can realistically pay back from your future income streams, you’re surrendering yourself to a life of debt-slavery.
Personal finance is not all about the numbers. It is about your values. Mine were honed over the past few years, as the scales fell from my eyes and I realised at work I was doing something I was ok with most days but in a way that really pissed me off, and I was doing it because I was fearful of the claim of that lender of last resort. It was time to give Mephistopheles the order of the boot.
Because I’ve had it for well over a decade, my mortgage wasn’t that much towards the end. It was a nice tracker, and capped to boot, but it had to go, though I did take the time to mull over whether ownership of my soul was worth the opportunity cost. Had I ramped it back up to 100%[ref]I don’t think this would have been permissible, I could reclaim overpayments but it wasn’t an offset[/ref] and bought the FTSE all-share in April 2009 I’d have been about £20,000 better off if I sold up now. I can live with that.
So my soul is worth about 20k, It’s a good deal, that’s the price of peace of mind. I am a lot more risk-tolerant with money that I have made, but less so with money I have borrowed. That’s because in the 1990s I saw what happens when you buy assets on leverage and they go down. You get to pay months worth of overpayments into a black hole called negative equity. Although an offset mortgage is designed to offset money you have borrowed against money on deposit, in the end it is still a mortgage – the company has a primary charge on your property.
Mortgages are a young person’s game IMO
Although a mortgage is nominally charged against the value of a house, what actually pays it off is the future value of your income stream. The future value of a burned out Ermine’s income stream is lower than of the 30-year old in the 1990s[ref]It’s probably not zero as I suppose a pension is a future income stream, and in some ways more secure than income from employment, you don’t get made redundant from a pension.[/ref]. It’s why for most people [ref] I’m talking about wage-slaves working for The Man here, not people whose risk-tolerance is higher than normal, and or people who have unconventional assets like a business or BTL[/ref] you should have paid off your mortgage by the time you’re 60, because the value of your future income stream starts to tail off for the simple reason you have fewer earning years left. If I were investing in buying shares of people[ref]I know, it’s called slavery, this is a hypothetical thought experiment ;)[/ref] give me an able 30 year old who is honing their craft over a talented 50-year old any time, because the income may be lower but the value of the human capital transforming into a future income stream is higher – because there’s more future!
It’s why I have little sympathy for over 50s who are still running interest only and grouse that they will have to sell their homes to discharge the mortgage. Let’s take a look at how they got here –
Underperforming endowments have left many people aged over 50 with interest-only mortgages facing an average shortfall of £49,000, according to [a special interest group pushing their equity release ‘solution’].
Er – no. Let’s try this again, shall we?
An ostrich-like mentality of ignoring warnings of endowment shortfalls in numerous letters sent to them from the mid-1990s onwards, ie a wilful refusal to act for over twenty years has meant these people failed to address their financial situation despite numerous warnings over decades.
That’s better. I was one of these people who got those letters in the 1990s. I fired off stinking letters to the endowment company. I opened a PEP (ISA in today’s speak). I pressed my claim and got reset to where I would have been with a repayment mortgage. Guess what I did with the settlement money?
I paid it right away to the mortgage company as a capital repayment, because that’s what it was – compensation to set me back to where my mortgage should have been.
Many people considered these a windfall and spent in on a nice new car or that holiday they’d always wanted. It was part of their mortgage, so effectively they were saying ‘let’s have a blowout, and hell, let’s add it to the mortgage’.
When endowment firms tell you ‘we lied, and you won’t be able to pay your mortgage off’ then the first thing to do is DO SOMETHING, FFS… Hell, that average shortfall of £49,000 would probably only have been an extra annual payment of £1000 (because paying down the capital reduces the interest). The Daily Fail tells us that wisdom comes with age, particularly in temporal discounting which is important in personal finance[ref]Yeah, I know it’s the Daily Mail. It’s peculiarly tough, because young people actually have more future so the cost of getting temporal discounting wrong is higher for them. But it does follow my life experience.[/ref] While at least with temporal discounting this probably does apply to me, it seems unevenly spread in the older population 😉
The trouble with the demon Mephistopheles is that he plays a long game. It’s easy to forget the long shadow of the repo-man over the typical mortgage term of a quarter of a century. The starry-eyed young Ermine that casually signed way five years of annual income with a flourish of his pen is a different creature from the gimlet-eyed mustelid that signed the cheque discharging the final amount that transferred ownership. But Mephistopheles doesn’t forget, you gotta sign that cheque at some time, or deal with the consequences of the Devil owning your financial soul. I saw that shadow in the 1990s, and learned. My personal finance policy is simple
Owe nobody any money for more than half a year
I don’t take it all the way to Shakespeare’s advice to Laertes
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
And borrowing dulls the edge of husbandry.
No rush of consumer baubles tastes as good as financial independence feels…