It must have been so simple when he was a nipper. You buy a house with a mortgage, and you got to pay back a shedload of interest and a teensy bit of the capital. 25 long years later and this happens
as the dynamic balance between interest and capital repaid shifts in your favour. The downside, of course, is that you have to pay off the capital. You pay roughly twice as much1 for your house if you buy it with a mortgage than with cash, due to paying interest for 25 years. Which is why some bright spark dreamed up the interest-only mortage.
Although we now think of them as ways to enable the BTL brigade to shaft everyone younger than themselves, the IO mortgage was originally dreamed up to make houses more affordable by halving the mortgage payments. Easy peasy. What actually happened for a while was house prices went up2, because every time you make the existing price more affordable the price adjusts so it becomes only-just-about-affordable, because that’s where premium scarce goods reach equilibrium in a market economy. It’s only the punters that can’t afford the prices and fall out of the market that puts a brake on house prices, but UK governments have never acted on this because most voters want high house prices. Governments will change that when the increasing age people buy their first property means there are as many non homeowners as there are homeowners of voting age.
Enter stage left, an accountant, age 77, mithering about his IO mortgage being called in
who didn’t realise you had a pay off an interest-only mortgage in this lifetime, rather than the next. Len, this post is for you. There’s pathos in this story on so many levels, I mean, FFS, this dude worked as an accountant for a living. It’s fair enough for the interest-only mortgage to catch out young whippersnappers like Joe and Josephine in the hands of Mr big Bad Wolf, but grizzled greybeards of 77 who have only just wised up to the fact that they have aught to pay off the capital have no excuse. These guys had the temerity to complain to the Financial Ombudsman and then when they got the finger from the FOS because of the pickle they got themselves into through overspending in retirement, bleat to their local MP. The MP spins this as a tale of dreadful ageism by Santander. No, they’d just like to get their fricking money back before you die. I’ve done this story too many times before, WTF is it with the British and housing?
I know it’s impolite to mention the Grim reaper but it’s a fact that every 24 hours you live you get a day closer to death. I am nearly three decades closer to death than when I took out that mortgage, which is why I paid the bugger down, and that’s even without the benefit of a life of accounting to see the problem rushing up to meet me. The MP puts this spin on it
Lloyd called on Santander to either increase its age limit for mortgage borrowers or abolish it, and said: “Without such a move, Mr and Mrs Fitzgerald will lose their home. Is that really what the bank wants to see happen? I will also be raising this vital issue in parliament. I am sure there are tens of thousands of other families potentially facing the same, desperate situation in the coming years, which is unacceptable.”
No. It’s a situation that has been developing over decades, and they can’t say they weren’t warned. The Fitzgeralds chose to stick their heads firmly in the sand, and that’s why they are in the shit. It also shows the folly of another innovation in mortgage finance, the short-term fix. These guys remortgaged in 2007 for 8 years. It’s fair enough, when the 8 years are up, you need to ask again if you can stay in that house if you don’t have the money to redeem it.
You have the option to borrow from someone else I guess, but nearing 80 you just aren’t a good prospect, because you have zero human capital left. If you financial capital isn’t enough to keep you in your house, then you don’t get to stay in that house, and you can’t earn any more financial capital. You are stuffed. The moral of the story is pay your bloody mortgage off in your early retirement, or be prepared to move or rent.
This is not a sob story of somebody who was taken out by events beyond their control. This was wilful overspending on a big scale for decades. I could have had many fine holidays with the money I used to pay down my mortgage. The fact this guy plied his trade as an accountant takes the biscuit.
The Way We Were, B.M.T
Before Margaret Thatcher, who became prime minister in 1979. The youthful Ermine voted for her party – if you lived through Britain in the 1970s when it was run by the unions and Arthur Scargill you would understand the attraction. Never voted for her again, but she did do a lot of good, and a lot of bad.
In the good old days head honchos of the nation’s building societies gathered in smoke-filled rooms to have a chinwag with the government along the lines of “how much lending should we have in the market this year, dear boy?” 3
That worked fine for a long time and building societies had 80% of the home loan market at the time. It was stuffy, Dad had to put on a suit4 and go for an interview to be able to get a mortgage, and show some evidence of financial probity and proof of earnings, all things that we discovered were totally unnecessary to qualifying borrowers in the intervening years.
Then Thatcher rocked up, you can pretty much trace anything that is wrong with UK housing to Thatcher, later governments tinkered on the side but never put the fire out because people thought they were rich when their house was dearer than what they paid for it.
She decided that all this stuffiness Just Will Not Do, so let’s lift all these stuffy restrictions, and then later on bring banks in on the home loans act too. Lenders gonna lend like haters gonna hate, , and it’s an ineluctable law of economics that when you have more money chasing a limited resource, the nominal price of the resource goes up.
Which is how my Dad got to pay £500 for his London starter family home in 1960-something, and a young Ermine got to pay about 100 times that much at the same stage of life on a crappy two-up two down in a provincial town, in a fit of Torschlußpanik folly. The Bank of England inflation calculator tells me that Dad’s £500 whould have been worth £4600 when I perpetrated the most monumental PF mistake of my whole life, so 90% of the difference in price is the result of a buggered up housing market. It’s only buggered up for new entrants, everyone in the system has an interest in ever higher house prices. Once, in a drunken stupor I did suggest to the somewhat addled host that the reason they were whingeing that their kids couldn’t afford to buy a house was because they kept governments in fear of seeing prices fall.
I’m not going to go all David Willetts and Resolution Foundation on y’all. Another reason is that better communications have concentrated jobs shockingly since the days when every village had a butcher, baker and candlestick-maker. There was once a time in the mid 1960s when people thought that London was going to die out as the population fell, but now if you want a well-paid graduate job it seems you have to start in London.
Britain has always had trouble with housing, in the old system you could afford a mortgage but often struggled to get one because of credit controls. Now you can get a mortgage easy, but can’t afford it because all the money sloshing about has forced the price up.
- at a typical 25 year term and interest rates typical over the last 20-30 years, the long-term average interest rate in the UK is about 6% ↩
- Until it all went titsup and we called it the credit crunch, then the Global Financial Crisis as the roosters came in to roost ↩
- Joint Advisory Committee to agree savings and lending rates at regular meetings between lenders and government, according the Christine Whitehead, which I discovered in this Swedish report, presumably the Swedes are looking fondly at our history and wondering how to screw their own lending market up as well as Mrs Thatcher did. You need deep talent and an insight into how to leverage human greed to be able to shit on people two generations not yet born from beyond the grave, an ordinary MBA just will not cut it. ↩
- He was a fitter, so overalls was work attire, not a suit ↩