100% mortgage backed by BOMAD? I’ve seen this movie before – it didn’t end well

Rich kids will get to bid up house prices aided and abetted by BOMAD1 and a Lloyds bank 100% mortgage. BOMAD are on the hook for defaulting rich rugrats in the first three years, then Lloyds bank should be OK with the equity said kids2 have built up in those three years. Let’s hope Brexit doesn’t make the housing market go titsup, eh?

No, actually scratch that. I wish exactly that. I have no sympathy for these featherbedded chillun – let them suck up the negative equity, and let BOMAD be rocked for a chunk of the debt as a useful playing-field levelling action. Bring it on.

Perhaps after that’s happened some other poor devils will get to afford a house, should they be fortunate enough to still have a job in post-Brexitland.

BOMAD-backed mortgages are tough luck for kids who don’t have well-heeled  parents, because, natch, the rich kids will bid up house prices. So we can understand the delightful sentiment behind Frank Field’s letter to the Grauniad which proposes extending the largesse of the 100% mortgage to all those who don’t have access to BOMAD. Bless your egalitarian cotton socks Frank me old mucker, but you happen to be older than I am. So how come in your 76 turns around the sun you haven’t noticed yet that if you subsidise people’s mortgages, what happens? House prices go up. The maths is simple.

Punters have £x they can spend on housing, and in general when you are young an inexperienced as to the vicissitudes of financial life you deploy all of that £x, because everybody around you tells you that you can’t lose with housing. You also don’t tend to have much capital behind you and are in the first part of your working life, so your earnings are limited. You’re running on empty once you’ve committed your £x to the rapacious maw that is UK residential property. There are no reserves. If you’re £x is more than someone else’s you soak it up by having more house or living in one of the more tony districts, or reducing the zone on your London Underground ticket if you are rich enough to buy in the Great Wen.

The market is set by some punters finding their £x just ain’t enough to own where they want to live, so they leave the market for the rapacious BTL rental market, reducing demand of housing to buy. So, Frank, you go and subsidise that buyer’s £x by £y allowing these folk to borrow more than they can actually afford, guess what happens? Prices rise by £y, or if you subsidise mortgages by £y, by the increase they can borrow with that extra £y, which is a lot more. Result misery. This is an area that needs tough love because of the law of unintended consequences.

We’ve been here before. MIRAS, Help to buy3, LISAs. Get the government the hell out of the home loans market and keep it out of it, nail their feet to the floor. That includes you, Frank. Sure, BOMAD ain’t fair and the rich will screw everybody else. See also: private schools, moving to catchment areas, the lot. If you have the money you will always shit on other people’s kids to get yours ahead.

Government – stay out of the home loans biz. Get into the house building biz

The government can do something about housing – build the bloody things as social housing, don’t subsidise the buying of houses. Leave that to the market. Fewer that half of British households can afford to buy a house IMO. It’s a tremendously expensive capital asset that sucks up roughly 6-10 years of your gross earned income4, and in earlier generations before 1979 we catered for these people with something called council housing.

Let’s not over-romanticise that – some council housing was ghastly, I remember playing on some of the elevated walkway council estates as a kid where some friends lived, and they were dire. Council houses were often terrific, though, particularly for families – far more space than the typical four bedroom premium executive detached-in-name-only5 rabbit hutch constructed now.

Typical taste bypass of a modern estate aimed at those with more money than taste, this one in Turkey. Someone’s missing the whole point of a castle, these ones are definitely DINO. A castle should be 10 miles from the nearest one 😉

The government should stay out of the homes loans biz. Totally, other than to regulate charlatans, minimum lending standards, and to deny BTL lending totally IMO. I’ve nothing against private landlords, if they really own their properties. If they are competing for mortgages with homebuyers, well we survived perfectly well without BTL mortgages up to 1994 and nothing about the British housing or rental market has gone in the right direction since then for the poor bastards that have to live in the properties.

If the government wants to do something about housing, then look to the days before Thatcher screwed it all up to buy votes giving away free money to council tenants with Right To Buy. They were council tenants because they weren’t rich enough to buy their homes, and 40% of these houses are now in private BTL hands, shitting on the generations after. Thanks, Thatch.

We could roll this back  – build social housing, which we used to call council housing, and employ the best lawyers in the land to place a perpetual restrictive covenant on council housing so that any politician that even thinks of doing a Thatcher Right to Buy to sell them for votes is threatened with an official summons to be put in the stocks at the Tower of London to be pelted with eggs by everybody that can’t afford to buy a house until they think better of it.

In other news, personal insolvencies reach a seven-year high and household spending is at a 13 year high often fuelled by credit or depleting savings. Just the sort of situation that absolutely calls for 100% mortgages , natch?


  1. That’s Bank of Mum and Dad if you are one of the lowlife oiks that don’t happen to have mater and pater with the odd 10% of your starter house kicking around in loose cash they don’t need for three years. 
  2. In the curmudgeonly Ermine worldview you’re still a kid whatever chronological age you are if you are financially dependent on your parents. Paying your own way in the world was one of the key rites of passage to adulthood in my day. I do appreciate that such non-launched kids like to be called adults nowadays, but this is my narrative, so bite me ;) 
  3. Help to buy was on new houses, FFS. Yer typical first time buyer isn’t rich enough to spaff their money on a new house, you whazzocks. This was straight bung from taxpayers to Dave’s housebuilder chums 
  4. At a purchase multiple of say 5* one salary, and typical mortgage terms at typical multi-decadal British interest rates of ~ 6% means you pay about twice the capital sum over 25 years 
  5. DINO is when there is separation of about two inches from one ‘detached’ house to another. You need a few feet to get away from your neighbour’s bad taste in rap and to keep your squealing grandchildren out of their beauty sleep. 
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Shares beat housing, even in Blighty

You’re a lone voice in the wilderness if you favor shares over property in the UK. UKVI calls out  five family members who are of the ‘property is my pension’  school of thought with him being the odd one out. Me too – BTLers to the left of me, housing rampers to the right of me – a cynical Ermine feels stuck in the middle with Stealer’s Wheel

on the subject of property, specifically residential property. It’s an asset class I loathe, and yet everybody else in Britain is in love with it. There is, apparently, no more sure-fire route for an ordinary middle-class Brit to financial Nirvana than a nice li’l buy-to-let or two, preferably bought with the magic of other people’s money.

In the limiting case, we will have everybody over 45 ‘owning’ two houses renting one of them to people under 45. Britain’s factories and service industries can lie shuttered, and we will have a perpetual motion machine when all the old ‘uns can retire at 50 and throw parties where they moan about their children not being able to afford to buy a house. Presumably the proceeds of their BTL will be handed down to their children when they reach the allotted hour, hopefully when said children get to around 451, and so the circle turns again.

So I was pleased to see on Monevator’s 10’th anniversary post  a copy of this chart from This is Money

Where it appears that shares beat residential property by about 30%. With shares at very high valuations at the moment that is comforting – if we have an average sort of crash2 soon then that 30% differential could easily be given up at the low water mark, but UK house prices are also at all time highs. It is not entirely clear to me on what basis This is Money computed the TR data for housing – by rights they should include rents, less maintenance and less mortgage servicing costs, conveyancing, SDLT and agency fees for the average BTL hold period whatever that is.

Perhaps the BTL boosters were right, provided they could raise the capital to go all-in in June 1995. That’s a yes for Fergus Wilson but perhaps a no for pretty much everyone else, because of the lumpiness of property you need to time your entry into the market very, very carefully, and the slow cycles mean entry points are few and far between. If ever there was a call for an investment trust3, residential property would be an obvious asset class, presumably the reason there isn’t anything like this says something about the aggregate returns on offer.

UK real house prices – 1995 was a barnstorming year to start your property-owning journey. The downturn at the end has tipped up again – KPMG have a report from 2017 for those wanting more

Stock market cycles are shorter than housing cycles, and 1995, the datum reference, was an absolutely great time to buy UK property, as twits like me who had bought property in 1989 started to capitulate and actually pay down the excess rather than hoping that it would ever come good again in any useful period of time. KPMG tell us 2009 was the second time house prices crashed since the second world war, while there have been 15 stock market crashes and bear markets since the war, counting US and UK ones, the sort that would bother somebody holding VGLS100 in the UK if it had been available in Macmillan’s time.

Ever the contrarian, Merryn Somerset-Webb tells us that these days houses are cheap in terms of gold, and I didn’t do so badly compared to people who bought between 1997 and about 2003.

All I can say is that she didn’t live the decade when my mortgage was higher than the value of the house or pay the difference down from earnings… KPMG have a chart of mortgage interest versus income which highlights that I drew a particularly short straw in 1989

Mortgage interest as a proportion of wages

Although the recent highlighting of mortgage plus repayment shows servicing costs are at historic highs relative to the early 1990s. Presumably KPMG is of the opinion that previous generations paid down their mortgages with fairy dust rather than real money.

I am all for buying the house you live in – pretty much for the converse of the reasons Joe Public gives for landlordism. Renting is evil in the UK and residential tenants have very little security of tenure. This is what makes landlords rich. You want to free yourself from the ministrations of Britain’s army of amateur landlords, because what’s good for them is not good for you. After that’s done, residential property is a shockingly illiquid lumpy asset class compared to the average Brit’s net worth, with serious costs of carry and transaction costs, because a house is a physical object subject to entropy; it’s always trying to fall down. As an asset class it stinks on the convenience front because of its indivisibility and illiquidity.

Unlike gold, it is at least productive, inasmuch as it provides a service that tenants will pay for. It’s not tremendously scalable, you’ve got to save up a lot of rental profits before the deposit on the next place, unless you are a Fergus Wilson, who happened to start in the early 1990s of knockdown house prices.

Stocks you can buy bit by bit at average prices. Houses, not so much

There are other shockingly toxic issues to do with residential property. You can invest regularly into the stock market, it’s called pound cost averaging. I do this still now – I think the stock market is ridiculously overvalued, and I hate myself for buying into it regularly. But it is remotely possible that it will go up for a couple of years, in which case I will lose out by diddling on the sidelines even after the inevitable crash, although I am reducing my contributions and holding more cash than is probably good for me.

You just don’t get to do that with residential property, you go all in with borrowed money when you buy your first house, somewhere in your thirties is the place in the normal human lifecycle. Vendors will laugh you out the door if you ask to buy that house over the next ten years in instalments with it marked to market each time.

Since you can’t raise the money you buy with a mortgage. That works like gangbusters when the housing market is going up, but it’s total misery when it’s going down. Because housing cycles are slower the misery persists longer, too. So not only do you not get to ramp your way into this market in a measured way, you get to do it at a time not particularly of your choosing – the time you need to engage with it was determined by la petite mort nine months before you were born, although it only comes to fruition after three decades pass.

My experience matches the chart. For sure, I was whacked around the chops with a wet fish by the stock market in the dotcom boom and bust as I learned the ropes, particularly in what not to do.

what not to do – contract notes from my dotcom days. Do. Not. Churn.

But it served me far better since then, and most of the gains I have made were from a combination of saving hard and the stock market. The hit I took was all money I had earned and could afford to lose, whereas with the house I hadn’t earned the money that I lost and could only just afford the loss. If I scale the money I stupidly paid for that house in 1989 and adjust it for inflation then it is only 20% less than my share of my current house, perhaps 40% less if I allow for the amount of equity I released along the way, which went into the stock market. I’d have been better off with gold, although the utility of a house in defending myself against the depredations of BTL landlords has great value of its own.

So it’s good to feel vindicated, despite all the property clowns to the left of me, joker landlords to the right of me. Those results have integrated several stock market cycles including one near death experience in 2008, but perhaps two housing market cycles and no catastrophic events like the early 1990s housing price crash. Reversion to the mean, clowns and jokers… In your favour, the illiquidity of your assets mean you escape some pathologies of the stock market investor, as UKVI went on to say, but you don’t have to be a stock market muppet!


  1. the implication is that they have these kids no earlier than when they are about 35, else the kids will be too old by the time the parents cark it 
  2. The credit crunch was a non-average crash – from the UKX high of 6732 in Jun ’07 to a low of 3800 is a suckout of 44%, it took to July 2009 to recover to only a fall of a third. But then unlike you do with a house, you’re a bit dippy to save up in cash for years and make a single humongous share purchase, so your average purchase price is unlikely to capture only the peak 
  3. You get plenty of investment trusts in commercial property in the form of REITs but despite the generally believed sure-fire one-way money-tree nature of UK residential property I know of no residential property REIT. You get oddball companies like Grainger PLC, and Castle Trust bastardised their Housa index product into bonds, presumably because they couldn’t turn a profit on it. Such a product would greatly help first-time buyers by allowing their deposits to track house prices. The closest I could find to a res property REIT is Hearthstone, but another problem for buyers is they need to track prices in the region they want to buy, since nobody buys the average UK house in reality. IG Index used to have regional house price indices, but the problem with spread betting is that the cost of carry is high for periods longer than about six months. 

Retired accountant fails to understand interest only mortgage, loses house

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

how a traditional mortgage builds equity

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. Continue reading “Retired accountant fails to understand interest only mortgage, loses house”

Cheques checked the recipient’s name – BACS & CHAPS use untested numbers

It’s a funny old world. Way back in 1979 when I got my first bank account I got issued with a thing called a cheque book. You could write out the recipient and how much you wanted to pay them and that was all you needed to do. In those days the cheques were open, so some thieving git could swipe it or steam open the letters, and pay the cheque to themselves or ask for it to be paid in cash over the counter. Fewer people had bank accounts then – when I started my first job I was paid by open cheque that I had to go to the bank over the road and exchange for cash.

To forestall the hazard of dodgy geezers steaming the mail open they changed the system so you got to draw a couple of lines across the cheque and write A/C Payee, and they changed the law such that this happened

Not if it is crossed ‘A/C Payee Only’ or ‘A/C Payee’. The Cheques Act 1992 and Section 81 of the Bills of Exchange Act 1882 give statutory power to the ‘A/C Payee’ and ‘A/C Payee Only’ crossing, when it is used. The legislation means that a cheque which bears the ‘A/C Payee’ or ‘A/C Payee Only’ crossing can only be paid into an account in the name of the receiver of the cheque exactly as it appears on the cheque.

A cheque crossed A/C payee. Presumably the computer’s trained to ignore the * sign.

Now in practice you could usually get away with paying in cheques in a different name if they were small, or if it was just the first name that was different. I presume if the payer kicked up a fuss then the bank would have clawed the money back, and if recipient had skipped to Rio then they’d have to refund the money. All in all a perfectly serviceable system, though because of all this possibility of fouling up you could only count on having the money after about five working days of paying the cheque in. When I bought my last house in the dog years of the 1990s, I had to make up the mahoosive amount of money I had lost on the previous one and pay even more because I was going upmarket from the two-up-two-down bachelor pad I had foolishly bought in 1989. To do that I went to my solicitor and paid them a cheque. There was never any issue of the secretary deciding she wanted a knees-up in Lanzarote with all her pals funded by running off with the cheque because she’d have had to change her name by deed poll to the solicitors and open a bank account in that name.

Fast-forward 20 years and we don’t check the name any more

Twenty years of technical progress passes, and I get to receive the proceeds of my old house. It all comes down to a six-digit number and an eight digit number. Sure, the payment system would like a name to put in the payee field, but it doesn’t matter if you put Mustela erminea, Beyonce or Beelzebub in there. The routeing system doesn’t give a damn. So criminals hack emails and change the details, because the humans look at the name and think it’s all okay but the transfer goes to a different account, which is then emptied and the bad guys scarper with the money. And you get to read newspaper articles like this, this and this

Given all the usual delays involved in selling a house, there’s something to be said for the security of the good old crossed cheque. We were smart enough in the 1980s to realise that making the name matter was key to fixing this, but that wisdom has got lost in the search for expediency. Is it really too much to ask that 21st century money transfers meet the standards of the 20th century paper methods?

This pathology also applies to the faster payments system – it doesn’t matter if you make the payment to your cat rather than the payee, it’s all about the six digit sort code and the eight digit account number. They could make these combinations testable by the same system used to catch mistyping of credit card numbers, but this isn’t done either. Update – this Ermine rant is not in fact correct – see David’s comment below. Despite this, some people still seem to be able to screw up in this way – presumably they err is more than one number.

So you can easily mistype or transpose the numbers, sending your payment to the water company to Bill in Basildon, and you don’t get to know that until you start getting dunning letters from the water board. Bill doesn’t have to give you the money back – after all he’s done nothing wrong. He never claimed to be the water board, all he saw was a kind gift from an unknown benefactor come out of the blue, and he’s probably spent it now. As Faster Payments say on their website, it’s tough luck

Faster Payments, once sent, cannot be cancelled.

Whilst the vast majority of payments are made without issue, in rare cases problems can arise if the wrong information (e.g. sort code and account number), is entered – resulting in a payment being made to the wrong account.
It’s vital to double check the sort code and account number before sending a payment: payments are processed only using these numbers and getting them wrong is like sending a letter with the wrong address and post code.

The last statement is bullshit – if you send a letter using the wrong address and postcode there’s a much better chance of it getting to the right place because there’s some redundancy and there’s also local knowledge with the postman. And the name would help clarify matters, as it did with crossed cheques.

Double checking doesn’t help with some conceptual errors, like transposing some digit pairs, for the same reason that it’s tough to proof-read your own writing. To err is human – we could do with helping people out a bit. This is why credit card numbers use the Luhn algorithm, to catch simple cock-ups like transposition and single digit errors.

The six payment systems in the UK. More info from the BACS PDF

How about BACS – this is the payments system[ref]BACS has a rather neat PDF describing the six inland money transfer systems in use in the UK[/ref] you use when you put money in, or take it out of NS&I. My solicitor was proposing to use that for the house money because it would save me the £30 transfer fee. I decided I was easy with paying £30 to know I’d got it on Friday afternoon rather than some unspecified time probably Wednesday the next week. If something goes wrong, time is absolutely of the essence to flag up that the crims have made off with the loot to at least try and freeze the receiving account before they empty it over the weekend[ref]This is why in an ideal world you should complete on any day other than Friday, particularly a Friday before a bank holiday weekend. Of course, everybody wants to move on Friday so they don’t have to take time off work, which suits the bad guys just fine[/ref].

I was unable to determine if BACS checks the name, though the warnings from NS&I to get the right sort code and account number imply not. BACS gives you an automatic delay of three working days, as I found to my cost when I transferred money into NS&I using a debit card, and then got to ring them up to find out what black hole half a house worth of money had disappeared to. At least that made the three working delay between transferring out and receiving it a bit more understandable, though it still raised the blood pressure.

We have implemented a system without number error checksums, casually tossed away the A/C payee name checking of the cheque era, and sped up the ability of the criminals to scarper with the money by an order of magnitude. This is not progress.

Michaelmas – a good time to get out of Britain’s favourite asset class

The Ermine has lately been that pariah of the bien-pensant crew, a vile second homer. Not particularly because I wanted to oppress the young of some rural district but to give me some more time to move, and widen my options. As such I have been long residential property. When everyone else in the UK looks at residential property they see this

but when I look at UK housing I see this

Housing is a particularly evil asset class because you tend to be a forced buyer, initially when you get old enough to need to set up on your own or want to fire out kids. That’s basically a function of when you are born, then add about 30 years. There’s not much scope for riding out the market cycles which are very long with housing compared to the stock market.

In our case although I was a free agent after retiring Mrs Ermine was very much connected with the location, but it started to get apparent that working in the open was starting to get physically demanding, and various things got in the way of even being able to get a field shelter. So it was time to move on, but the trouble was that just before we came to this conclusion, the good people of Britain decided they wanted the 1950’s back. I know that the protagonists say that dynamic Blighty is being held back by the sheet anchor of trading tariff-free with the EU and wanted to take back control, but the trouble with all that is none of them seem to have a clue. They don’t agree on what they want, and they have no idea of how to go about it. Brexit may mean Brexit but no bugger seems to be able to tell us how they plan to make it happen. Those that do major on bluster rather than substance, BoJo, I’m looking at you, while you’re not busy making our man in Myanmar’s toes curl by reciting Kipling in their temple, FFS. I know you want to recreate the glory of Empire, but not everyone is as fond of it as the Brexit brigade and as foreign secretary it behooves you to keep that in mind. Keep the Kipling for the Conservative Club, eh?

The UK housing market seems to be in a strange place at the moment, puffed up by low interest rates. I wanted to go upmarket a bit, and there seems to be a strange effect of compressing prices. You seem to have to pay an awful lot to get anything at all, and not as much more to get a lot more house than when I last bought a house. We aren’t getting younger, so I wanted to do this before Brexit, not after, although people going upmarket want a housing crash. But I didn’t know if that compression would unwind, and in the end I don’t have enough time to sit out the cycle.

So we bought the new place a couple of months ago and completed the sale of the old one recently. It’s good to be clear of it by Michaelmas – one of the old quarter days. The quarter days were traditionally days when debts were settled and when magistrates would visit outlying districts to administer their justice.

“There is a principle of justice enshrined in this institution: debts and unresolved conflicts must not be allowed to linger on.

However complex the case, however difficult to settle the debt, a reckoning has to be made and publicly recorded; for it is one of the oldest legal principles of this country that justice delayed is injustice”

On the way to the Postmodern

It is pure happenstance that this came good for me by Michaelmas, but I like the olde-worlde symbolism. Some commercial leases still cleave to the old quarter days for rent periods – I noticed some shops closed or moved in the last week or so, presumably when their rent period ended.

I discovered that the trauma of the first house I bought runs very deep. Whenever I look at a house, in the back of my mind there is a siren going off which asks “yes but what happens if this falls by half in real terms” because that’s what happened to me. And there are parallels with 1989, cynics would say that to an Ermine every year has parallels with ’89 in housing – but:

Prices were in the late 1980s Lawson boom because of government policy. Well, they’re high now because of government policy – 10 years of interest rates way below the long term average means people can ‘afford’ to pay stupidly high prices. I would hate to be bringing new money into this market – although we have bought ridiculously overpriced property we were selling overpriced property to buy it, and divesting ourselves of land which is a similar asset class.

Then, in a couple of years, there was a recession in the early 1990s. Perhaps in a foretaste of Brexit we attempted to track the ERM and failed dismally in 1992. I was paying a mortgage rate of just shy of 15%. Unless you’re a rampant Brexit booster we have that recession coming our way, hell, we voted for it. If anybody wants to see what Britain’s free trade agreement with the US will be like, well, let’s see how it goes with Boeing and Bombardier, shall we? The Telegraph is steaming that May took dictation from the EU, but the US is the 900lb gorilla compared with the UK. It will be a case of “here are the terms, you sign here”.

So we have high valuations, the only way for interest rates to move is up, and we have got a recession on the way. As the IPPR said in forever blowing bubbles

In short, house price rises are particularly vulnerable to depart from fundamentals and are very hard to correct if they do. Meanwhile market actors are likely to suffer from momentum behaviour and have strong reasons to behave speculatively. So, we move from periodic bouts of fear of ‘missing the boat’, followed by the pain of negative equity and retrenchment.

OK, so we haven’t heard much about negative equity for three decades. So it’s all different now and that will never happen again. Until it does. But at least I’m out of here. One bite of that damn cherry is enough for a lifetime.

Buying a house is a lot more scary without a mortgage

I last bought a house 20 years ago, with a mortgage for most of the capital. You never see most of the money, because a lot of it’s between the solicitors and the mortgage company. When you do it without a mortgage, massive amounts of money go flying in and out of your bank account – for starters the normal payment system seems to max out at £100k, so I had to go to the bank to initiate a CHAPS payment. Then of course there’s the  stress of trying to ensure thieving bastards don’t intercept email transactions, basically don’t let solicitors act on emails account details, face to face is the only way 😉

You can borrow from your ISA under certain conditions

I also learned that you can borrow from your ISA, this helped me capitalise some of the second house. To do that it must be a flexible ISA – not all ISAs are but it so happened that my Charles Stanley one was, although my TD Direct ISA wasn’t. I use the CS ISA for index fund investing, basically world according to Kroijer  with an L&G FTSE World ExUK tracker, to lean against the UK bias of my shares, matched with VGLS100. I sold a hefty chunk of this and took it out, as long as I put it back by the end of March I still have my entire 20k allowance for this year. Which is pretty neat. What borrowing from your ISA won’t help you with is if you need to borrow money across the April change in the tax year – in that case you lose the tax shelter.

All this means my ISA is about 30% in cash now. I’m not in that much of a hurry to restore it to what it was before because the markets are at a high, but I am still regularly buying the two funds back.

Fear and loathing in Britain’s favourite asset class

On a small island with a lot of people, there is one type of asset that has become a national religion for Britons, and that is residential housing. You can’t lose with bricks and mortar, is written through the national psyche like the lettering on a stick of rock. It runs so deep within the national character that we have the common spectacle of well-off people preying on the poor by buying up houses to rent to others on a onesy-twosy basis, using the terrible security of tenure in British rental housing facilitated in the Housing Act 1996 to extract cash from those who can’t get a mortgage because they are too poor.

Thatcher handing something over that wasn’t hers to give – an early RTB house deeds

So rich people use their better creditworthiness to borrow money to buy houses to let, renting them out to poor people who can’t borrow money to buy houses, and making a tidy profit. They even claimed back the tax on the mortgage interest, a privilege denied to the poor saps who are buying a house on a mortgage to live it it. I am pleased to say that this nasty little anomaly has been canned now 😉 Britain has too few houses as it is for people who want to buy-to-live, they don’t need BTL (buy-to-let) middlemen inserting their money funnel into the punters’ wage packets sponsored on the government’s dime.

When the Ermine was a child, this job of landlording to families was largely done by the councils and the poor and even the modestly well-to-do had the option of renting with an adequate security of tenure, but those days were lost when Thatcher bought the votes of the sitting council tenants by selling the council housing stock to them at a knock-down price. The official version of this is of course a roaring success

the policy of giving tenants the Right to Buy on advantageous terms their council houses gave immense pleasure to many who had never imagined being able to possess a place of their own and pass it on to their children. People were ecstatic.

Well, they would be. You always make friends dishing out free money, and it was the discounts (a.k.a. free money) given with Right to Buy that made the impact

 the Right to Buy had benefited a large number of individual households but it has also had an uneven impact spatially and socially, has added to residualisation in social renting and has had an adverse strategic impact on housing. The discounts provided under the Right to Buy had inflated the demand for home ownership. In the longer term transfers to private renting further diverted resources to meet higher rents in the private sector rather than providing additional or affordable housing.

[…]

Looking back over the history of RTB it is apparent that, rather than the symbolism associated with a legal Right, it was the manipulation of levels of discount that were key to the operation of the policy. The Right to Buy with lower discounts would have had much less impact.

Which is how we got from my London grammar school days when about half the kids lived in council houses, including some of the ones whose parents were white-collar workers, to today where almost half of all local authorities in England no longer have any significant council housing.

Housing is to the Ermine as Moscow was to Napoleon

Rule 1, on page 1 of the book of war, is: “Do not march on Moscow”. Various people have tried it, Napoleon and Hitler, and it is no good.

Monty

So it is with the Ermine – the greatest personal finance error I have ever made was buying a house in 1989. I have never managed to beat that level of numbskullery despite greater resources. Now I hope that this is an indication of actually using the intervening 30 times round the sun to improve the art of being human, but let’s face it, the bar was set very low for the depths of financial folly I needed to avoid plumbing again. I moved once since that first house, because a two-up-two down was okay for a bachelor Ermine but when DxGF moved in it was time to get some more space, which is the entirely average three-bed semi I am in now.

When I bought it in the dog days of the dotcom boom, I bought the new house before completing on the old house. That sort of thing makes moving a lot easier, and you can get decoration and rewiring done much easier in an empty house. I hate being a function of other people, so housing chains rub my fur up the wrong way and make me snarl. The amount I had lost on the old house meant I could carry the old house with a combination of savings and a hefty 0% interest loan on a credit card, I had a 90% mortgage on the new house.

I am looking at moving again, and it is a significant distance across country. Retiring is a good time to think about where you want to live, as the limitations placed by working are lifted. It’s not necessary to move, but I find the the dreary journey halfway round the M25 to get past the carbuncle of London more and more irritating, now I have the time and the money to travel more. On the other hand, a retiree needs to think about the human setting, so we want to move to an area where we already know a number of people, so in our case that is westwards but not particularly northwards.

Stoney Littleton Long barrow. One of the many megalithic sites that draw me westwards as a retiree. No, I’m not planning to live in it 😉

We own this house outright, and have stocks and non-residential land assets, the combination is considerably more than the sort of house we are looking at buying.If I put the stocks together with the proceeds from the land assets and cash I hold, I have enough to buy a house of the sort I want before selling the current house. Trouble is all the stocks are in my ISA. Some of the cash is with NS&I ILSCs, ideally I would prefer not to sell that either. Some of it is in my SIPP, had I jumped to it I would have drawn out to just below the higher rate tax threshold last month, but I failed to engage brain there.

I get to do that this month, drawing ~43k gross, and pay £7k in tax. I can chill about that because I would have paid 41% in tax had I not used the SIPP when I earned the money. So I am still 21% better off, and indeed I got the Brexit boost on that last year since it was in some international exUK index fund.

I started to sell out of some of the ISA, though of course keeping the cash in the wrapper until the last moment. I started with the crap, the sorts of things one acquires in a HYP but turned out to be a really bad idea. Many years ago I came to the conclusion that while I may do okay on buying, I have no talent for selling, which is why in the HYP I don’t sell out of the crap. Some of it even came good – dogs like RSA eventually crossed the loss to breakeven to profit mark simply by paying dividends. Some didn’t, I followed Warren Buffett into Tesco, and, well, ’nuff said, eh? At least I had illustrious company in the cock-up. I paid less than WB1, but he bailed faster. As Buffett said (p18)

In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

I ain’t got Buffett’s talent, I was far too trigger-happy as a seller, so I needed to stop that. That trigger-happiness shows even in my actions here – although I believed I was going to liquidate the entire ISA to raise the cash at the time, I started shooting dogs first. A different way of looking at reversion to the mean might have started to liquidate from the top, after all those are the greatest gains to be crystallised. Once a mutt’s lost > 50% most of the damage has been done 😉

you had it coming to you, bud. There is a school of thought that says you should actively seek out dogs, but I’ve waited many years for my ISA mutts to turn, they aren’t just last year’s disreputable hounds

Shooting the dogs was easy. Most of them I’ve had for a long time and they’ve never come good. Now a fifth of my ISA is cash, and I’ve run out of hounds to put up against the wall.I had about a twentieth of the ISA as mutts, I sold about a twentieth of good stuff before I just couldn’t do it any more, and a tenth I carry in cash because you never know when buying opportunities may show up.

exchanging equities for housing felt that I was marching to Moscow. No good would come of it…

Look at the housing market now. It is up in the sky 2. We have the economic damage3 of Brexit coming down the pike, inflation is lifting which may bode rising interest rates and the market is softening. That’s not necessarily a bad thing for me, as I am looking to move upmarket. I’m not carrying any debt once all is settled so rising interest rates don’t trouble me, but they sure as hell will trouble others in the market carrying a huge mortgage based on affordability at 2%. Which will depress prices, because if they can’t pay they won’t pay.

This play by Dario Fo was big in the early 1970s inflationary oil shock. The title could be the anthem for Britain’s overstretched mortgagees as Brexit inflation starts to bite and interest rates rise. According to Wikipedia, Pluto Press was a division of the Socialist Workers Party when this was published.

I looked at what I have left in the ISA and I simply couldn’t bring myself to press the sell button, and exchange stocks, something of value, for housing, because I loathe the housing asset class. Couldn’t do it even on a temporary basis, as I searched for something else to sell from the ISA and would have had to mine the good stuff I began to feel sick, and an old recording started to play out in the back of my mind. A recording first made in 1990 through to 1992, when I froze in that first house to save money for the mortgage and subsisted on peas, economy bean soup mix4 and rice while I watched one neighbour get repossessed and the other side jump before that happened. Interest rates came within a hair’s-breadth of 15% p.a. Intellectually I can tell myself that things are really different this time because I am not buying as a leveraged buyer with a mortgage, but it’s no good. I drank the water from that polluted well before and was sick for ten years. Sure, I’ve taken losses in the stock market, but never got to lose more than I had to start with…

Repairing the ISA

I need to go fix the damage I did to my ISA estate by trying and failing to convince myself I was going to liquidate it to bridge the housing purchase. I can’t honestly say I am that sad to see the back of the dogs, though they did of course serve as a sort of memento mori reproaching me to the tune of “Self, you aren’t such a fantastic hot-handed stock-picker – I am TSCO and I remind you that you had absolutely no ‘king idea of what you were doing trying to slipstream Warren Buffett, so don’t get so full of cock”. I have a limit order on some gold that should go through this week, because God knows what the pound will do over the next couple of years, and it’ll bring down the cash to 10% where I’m easy with it. There is a case to be made that a fellow with no unwrapped holdings any more should hold his gold outside tax wrappers, because I don’t have so much that CGT would be a hassle, and gold doesn’t pay dividends which are troublesome outside a tax shelter nowadays. But I just need to get it to a holding position for now. And my Charles Stanley ISA needs to go back into VWRL and L&G Dev World ExUK where it was, so I get to eat a load of transaction costs for my thumb-sucking indecision. Bummer. Still beats the hell out of losing all that ISA tax sheltering. At least I stepped back from the brink. Obviously I’m not putting my £20k new contribution into the ISA while I need short-term float, because I have till nearly this time next year to get round to that.

There’s the smell of decay in the air on housing

A grizzled snout sniffs the air, and I smell the sickly scent of putrefaction in the housing market, the scent the youthful Ermine  insouciantly ignored. One of the things that puzzles me about housing now is the shocking compression of prices. When I was buying my first house5 on the  terraced places were about £45k, and semis were about £60k6. Where I am looking Zoopla tell me terraced houses are about £214k and semis are £248k. It’s as if the entry-level prices have been skyrocketed proportionally, whereas the incremental costs to get something better has reduced. The terrace to semi ratio was  1.3 in the late 1980s and has fallen to 1.16 – you get a lot more for a little bit extra, and this still sort of holds going up to detached places, which command less of a premium than I expected. It is as if first-time buyers are flattening themselves, artificially boosting the crummy end of the housing market. Looking at my existing area this ratio is about 1.2. Only another 10% on my house would get me a detached house over the road. Of course Zoopla could be full of crap, but these differentials seem very squeezed to me.

The Ermine’s twitchy snout has picked up the last ten of the one real housing recessions we’ve had this millennium, so I am prone to false alarms, that early experience of housing is a distorting lens through which I look at Britain’s favourite asset class. It’s why I am not a BTL landlord, and property is a lot less than half my net worth. This is not because fundamentally I have a beautiful nature full of compassion for my fellow man, after all if I am not a BTLer then some other person will step into the breach. I am not a BTLer because I am shit scared of the asset class, it’s hateful because of what it did to me, it’s illiquid, it depreciates much faster with a tenant than an owner-occupier, and there seems a shedload of miscellaneous aggravation that goes with the whole patch.

Everything is vile about buying and selling houses in England. I haven’t done it for almost twenty years, and while the experience wasn’t great then, many things seem to have become worse. For starters, exactly what reason does an estate agent have to exist in the 21st century? The cheeky blighters seem to want to see proof of capital assets before taking an offer to a vendor, which is not easy in a distant town with ratty internet connections7 and no printer. This was an absolute blinder on me and was definitely not the case 20 years ago. I suspect there was also some subtle discrimination too, if I had shiny shoes and dressed in a sharp suit I might have been given the benefit of the doubt. But seriously, WTF is the point of an estate agent? I use rightmove to search8, the days of receiving endless offers of places 200% overbudget through the post aren’t something I want to go back to. Rightmove and other Internet sites actually listen and don’t show things that are overbudget. I would have thought the Internet would have fixed the problem of estate agents by eating their lunch by now, but it appears not.

I’m also unlucky enough to be selling into a gently softening market sector in Suffolk and a slightly appreciating one where I want to go. Some of that is because of who I am and what I want to buy. I want a detached place because I don’t want to hear people’s kids, pets and domestics, we want more garden, and stairs if any only in a straight line. I don’t want to see children’s trampolines and plastic toys, or people fixing cars in their front gardens. I don’t want to hear traffic from main roads, and I have no interest in new houses, which are tiny and too close together. I don’t want a ‘period property’ which is a maintenance and energy efficiency hazard. I don’t want anything near a river or less than 40m above sea level because of flooding amplified by climate change, low-lying parts of the target region has had problems with this in recent years. Something built from the late 1950s to 1970 is probably about right.

I am competing with old gits like me who have a working life behind them, and what I am selling is a 3 bed semi which is a typical family home. Families made hay with all the child-friendly largesse Labour showered them with in the times of plenty, and are feeling the draught now.  Hence the softening market my end. Countering that I am looking to move somewhere where there appears to be zero professional work to be had for forty miles9which tends to be the way for attractive places because work is usually a blot on the landscape.

The design of the conveyancing system in England is foul, where there is no commitment from the buyer and seller until exchange of contracts; something done so much better in Scotland and probably just about any other First World country. The English way brings out the worst in both the buyers and sellers, making evil shits of us all. Requiring a 10% escrowed deposit forfeited if either side welch on the deal would improve that no end. Hopefully being a cash buyer will help the power balance for me there, and not having a chain will help with selling. Time will show.

How about joining my fellow countrymen on the never-never?

How about borrowing? It’s all the rage on this septic isle, I hear. I can breeze way past the average UK household non-mortgage debt of £13,000 and lift the old stats a bit. Normally the Ermine has the same attitude to debt as a vampire has to sunlight, but:

I have the cash, but it’s tax-embargoed in my ISA and SIPP. Unlike the rest of the country, with their rising credit card debt, PCP car loans and whatnot in need of government help to bail them out of their fiscal stupidity, I actually have the money to back the loan. As long as I pay less than 20% over the life of the loan I am better off borrowing the money than paying the extra 40% tax on it taking it from my SIPP, which I need to clear down to £360010before reaching normal retirement age for my main pension.

I can’t get a mortgage, because I am too old and mortgage affordability is all about income. I would have thought a DB pension payable in three years time would be good enough as an income but it has to already be in the process of being drawn, and the SIPP doesn’t count because I draw in variable amounts a year according to need. The credit card company won’t give me an increase in credit limit to use the balance transfer stunt that worked when I bought my first house, because I am poor in their eyes, under the railway arches poor..

MBNA to Ermine – “Swivel on this, bud. You may, of course, beg us on bended knee and we may graciously reconsider your request”. Ermine thinks to self “well up yours too then”. There are other ways to skin this cat.

In 1989 two credit card firms loaned me £15k, the equivalent of £34,000 today at 0% interest to reduce my mortgage LTV. And they got paid back on time. In those far-off days you didn’t have to declare anything other than income on a mortgage application and there were no credit reference agencies. The 20-something year old Ermine doing the most gormless thing in his financial life with no capital was deemed a better risk than the grizzled mustelid of today who actually has capital assets several times the putative loan. No. I’m not bitter and twisted. Really I’m not 😉

I have been a small-time ~5k Zopa lender since 2013 until now when I recalled that to build up reserves, and curiously enough Zopa offered me a decent amount for five years at 3.4%. They had a much better repayment structure too. You have the take the loan for a long term, so that the repayments aren’t too high, but for a part bridging loan I don’t need to keep the loan for the term. Normally if you take a loan for five years, you don’t save any interest repaying it early. With Zopa it seems there is a fixed fee of .6% you pay if you have the loan for a microsecond or all the way to five years, plus 3.2% p.a. As such carrying the loan for six months would cost 2.2% of the loan – much less than a normal five year loan for that APR.

I liked Zopa, though in the end their 25k lending limit isn’t really enough to put much of a dent in the ISA. But I’ve often had the odd tax, ISA filling or CGT need to defer liquidating unwrapped shares from one tax year to another and I wish I’d thought of them before. I’ve used credit card 0% offers for these applications, but the trouble is one has to borrow about twice as much as needed (and pay the arrangement fee of ~2% of the total) because of the requirement to pay down the loan at 5% of the residual a month. Zopa is a much better match for that sort of thing.

In the end I raised the loan privately. It seems commercial lending to punters is axiomatically all about income, so it will always be mismatched to FI/RE folk. The takeaway from that when interest rates are low is don’t pay off your mortgage early – you will often need flexibility as you thread your way in early stages of FI/RE, particularly before you reach your DC pension age (55 at the moment). That mortgage gives you flexibility, and the tax-free pension commencement lump sum is a good fit to paying down the capital – effectively you redeem the capital with deferred pre-tax income.

BTL-ers score several hits on the Ermine by proxy

BTL owners are bad news for owner occupiers, for different reasons than why they are bad for tenants and for first-time buyers. As an owner-occupier you want to move away from such areas. BTLers are strapped for cash, and they aren’t there in person to deal with the consequences of their or their tenants’ actions. It slightly disturbs me that all the regions I used to live have gone downhill. My parents’ place in SE London used to be an owner-occupied zone where they were among the poorer on the block, over nearly 50 years it became a dump where Stephen Lawrence was murdered, I had a pushbike locked to itself half-inched from their drive in the 1990s, they got robbed in the early 2000s. I wouldn’t dream of living there if you paid me and provided an armed guard. And it’s gone BTL, because, well, it’s London.

Two places I had a bedsits in west London seemed to have descended into high streets of dirty chicken shops, betting joints and fast food retail. I guess the areas were already fully landlorded, but landlords in those days used to really own the places they rented, tending to be on a professional and larger scale. The blight of BTL mortgages started in 1996, around the time the AST was enacted, so BTL landlords could know that they could kick tenants out on reasonably short order. The area I bought my first house in Ipswich in ’89 has become a BTL rental dump with frequent mattresses on the street and much multiple occupation, and towards the end I had a pushbike nicked from my own back garden – not particularly to do with the BTL-ers but bike thieves prey on studenty neighbourhoods and BTL had made it studenty, so it was worth doing over for bikes. I’m beginning to suspect this downhill drift is a curse on me, but at least so far I’ve jumped in time…

Hopefully the BTL thing will be reined it a bit by not letting the BTLers squeeze real people who couldn’t get tax relief on mortgage interest payments, the poor devils are so desperate that first time buyers sometimes try to masquerade as BTL buyers to get round the way the system is stacked in favour of BTL buyers. I’m going to watch carefully for the presence of BTL in the next place I go.

BTLers have other adverse effects on housing – the market has slowed after being pumped because the buy-to-let brigade are finally getting soaked on tax on the same basis as real people who actually live in the houses they buy. It is perhaps a reason for the softening where I am, I’ve noticed more To Let signs and when you look on Zoopla they have been recent sales , so BTL was over this area like a rash a couple of years ago.

And finally I take an incidental hit in needing to front the extra BTL secondary home ownership stamp duty tax for the time I have two houses. I have zero ambition to become a BTL landlord, but I have to drum up an extra £10k because of the guilt by association and presumably have to fight HMRC to get it back.

But UK property is hopelessly overpriced?

Yes. It’s a foul asset class that has screwed me royally before. It will no doubt screw me royally again, at least to the tune of the difference between what I sell my current house for11 and the price of what I buy. But for the bulk of the transaction I will be selling a hopelessly overvalued asset to buy a similarly hopelessly overvalued asset. I have another 20-30 years of healthspan if I am lucky. Waiting another two years for the existential clusterfuck that is Brexit to make all of us poorer may save me money if there’s a housepricecrash,12 but it is 10% of that healthspan. The gimlet-eyed older Ermine is more able to take the hit than the fresh-faced twenty-year old Ermine who was shafted by the 1989 housing market. In theory a softening market is good for someone going upmarket, but the devil is in the detail, and there is always devil in anything to do with UK residential property.


  1. I bought into some of the suckouts, which reduced more my overall cost of acquisition. But TSCO was still a falling knife, and WB is still a better investor than me 
  2. Equities are also up in the sky now, although some of that is the Brexit effect making them look higher. But they’ve been tracking up since 2009… However, the tax sheltering of my ISA has a separate value of its own, I would be in deep shit with the changes to dividend taxation if I had to hold it unwrapped 
  3. or short-term adjustment to liberation pains if you are a Brexit booster 
  4. I just took a look for bean soup mix and I’m chuffed that they still do this, though the price looks astronomical to me. This stuff explodes in volume when you cook it so the young Ermine could stretch a packet of it a very long way, more than a week ISTR. Note that it’s a lot cheaper if you buy the parts from your local store catering to local Asian consumers and mix ’em up yourself rather than buying from Sainsbury’s 
  5. Although it was a similar time of excessive valuations, the distorting factor then was couples were rushing to buy to get dual MIRAS tax-relief on 60k rather than 30k, I presume they were targeting the semidetached sector with a view to having kids, whereas now the focus is on get anything 
  6. this was in 1989, the 2016 inflation adjusted amounts are £102740 and £137000 respectively 
  7. in the usual way, everything a mobile phone does, like providing a tethered data connection works, but badly and only a ghost of what it should be 
  8. I do appreciate the irony of using something owned by a bunch of estate agents, but at least they follow my limit and requirement instructions properly 
  9. I am, of course, looking at this with the jaded eyes of an ex-big company careerist, not the dynamic go-getting entrepreneurial sort that the powers that be hope will drag Britain out of the shit in the years to come 
  10. which is the amount non-earners can put in a pension 
  11. when owning two houses there is the risk of the market running against me over the difference. Although every other Briton believes you can’t go wrong with property I know from experience you can, and the current falling trend in the housing market is against me if I buy first and sell later, so I will try and minimize that period. Being a cash buyer and chainless seller has some value in the transactions, which may compensate a little for what I lose across the gap. 
  12. HPC’s wishful thinking gives them an even worse house price prediction crystal ball than the Ermine, they predict a perma-status of impending house price crash, pretty much the last 100 of the one retrenchments we’ve had 

a look back in anger at the endowment, a popular investment of yesteryear

Twenty-eight years ago I perpetrated the worst financial mistake of my entire life so far. I bought a house, in the hugely overvalued market of 1989. It seemed a good time to look back at how this happened, because today the Pru, one of the partners in crime regarding endowment mortgages, tells us that one in four retirees have never recovered from that kind of 1980s style cockup, and are carrying mortgage debt into retirement.Not only that, but three more waves of the the financial instrument of wealth destruction otherwise known as the interest-only residential mortgage will be crashing on the battered shores of British residential mortgagees in the next 15 years. I was only the advance guard.

Very few people are rich enough to have saved enough money to be able to service big existential debts like a mortgage in retirement, so the financial whizz-kids seem to be selling these guys equity release plans to fix the failure of their younger selves to live within their means by eschewing one or more of holidays, kids, pets or general consumerism. I recently came across the documentation for that piece of feckless financial foolishness, so I thought I’d deconstruct it here. Obviously Brits have learned in the intervening three decades, so our housing market is not at sky-high earnings multiples with people signing away a quarter of their gross earnings nowadays. Or maybe not…

You don’t have much control over when you come of an age when you need to find somewhere to set up house, most of the choices in that respect were taken by your parents and determined by the human life-cycle set by Nature. There’s a window somewhere between 25 and 35 when you need to tackle this issue. Your experience of housing will depend on what phase of the market cycle housing is in, plus some wider long-term societal changes, many of which are adverse. Cycles in the housing market a long – 10 years is not enough to see a whole cycle. I was a single man competing with an increasing number of dual income households because women were entering the workforce in larger numbers. I had already been driven out of the city of my birth by rising house prices and I really really wanted to buy a house, so much that I ignored alarm bells, massive factory sirens, red lights set at danger and just about every other indication that I was paying way too much. All I could afford was a two up two down where most of my colleagues from previous years were able to buy a semi on a typical graduate salary at The Firm. This even shows now – as an old git I am thinking of moving upmarket rather than down, because my hatred of the property asset class ran so deep that I never moved from the semi I bought a decade later.

feckless financial foolishness deconstructed:

Buying a house at that time was bad enough, but I compounded my mistake by choosing an endowment mortgage, because I was a foolish and greedy 28-year old. My parents had said the only way to buy a house was with a repayment mortgage, and made a decent case of as to why. So I listened to the sales patter of how a endowment could make even more than the capital, all tax-free, and the pound signs lit up in my eyes and in about half an hour I doubled down on the error of overpaying, signing up to this promise

So putting my 28 year older and wiser head on my 28 year old body, let’s take a look at what is wrong with this. If the promise had held good I would have paid 25 × 644.52 = £16113 to get £41500 in 25 year’s time. Which is a fantastic deal, what’s not to like? Ker-ching. Oh and my mortgage gets paid off if I die early. To be honest that’s not my problem, I suppose I should have made a will, because that was never going to benefit me – strike one. What I heard in the sales patter was a very good chance of doubling the money. What the dimwitted 28-year old failed to take into account is that I damn well should expect to double my money in 25 years time – at the time half the value of money died through inflation every 10 years, so in 25 years that profit would be worth diddly squat. I was clearly not reading the documentation right, because it only offered an extra 15k using the most racy projections, sustaining an investment return of over 10% p.a. for twenty-five years straight. Easy peasy.It’s the selective focus bias – you see what you want to see.

To get this putative win, I had to take an investment product described in the vaguest terms I have ever seen – never mind active or passive management, there was no idea of fees or anything else, it boils down to a statement of –  we will give it a go, but nothing is guaranteed, sunshine.

There is no transparency whatsoever, but hey, the salesforce can say anything to big this up. If this offer came across my desk nowadays, the second word would be “off”. At least I can say I made some use of the intervening three decades to get a little bit wiser.

So what happened? Let’s take a look at the state of play after fifteen years had rolled by, that’s half a working life in my case

Well, the good news is that I get about £5000 more than I’d have paid in at the minimum guaranteed sum. The bad news is that even with a total return after fees of 8% p.a. sustained for ten years I’d have been £11k short. Now in 2004 £11k looked like a lot of money to me, and I was pretty damn sure that I didn’t want to eat this loss. [ref]I am being slightly disingenuous here, because Friends Provident demutualised in 2001 and I got about £7k in shares which I sold immediately, and used to make a capital repayment, which I guess brought the outstanding amount to  about £34k.[/ref]

It seems that unlike 25% of my fellow endowment suckers I took action during the term of my mortgage to pay the bugger down, and eventually I kicked up enough fuss that Friends Provident paid me off with a bung in 2005, which I also used to make a capital repayment. Then as my career began to flame out and crash and burn in 2009 I started paying down more and more of the capital, adopting a financial brace position against no longer having an income. That’s actually a really dumb thing to do for people who are trying to retire earlier than 55, but fearful people make bad decisions sometimes, and that was mine. It meant I was poorer in the last few years, but I will be richer from about now – the mortgage could have smoothed my cashflow between retiring from work and getting to 55.

Look at those mad assumptions

Even in 2005 they were talking about investment returns of 8% a year. That just ain’t gonna happen on a sustained basis, and the lowest assumption of 7% way back in 1989 turned out to be total codswallop. That was the risk-averse cautious assumption – it’s bloody nuts. This was massive sample bias due to inflation – after all, just ten years before I signed up inflation in the UK was running at over 15%. You know what the man from the FCA says

Past performance is no guide to the future

Well yeah, but WTF else are you going to go on – Tarot cards or reading tea leaves? Mystic Meg? Inherent in the very fact of stock market investing is the nasty little assumption that you can qualify what you will get in the long run informed by what happened in the past[ref]this dirty little secret is inherent in the SWR and things like firecalc are doing nothing other than informing you from past performance[/ref]. Nevertheless, the 28-year old me could have avoided all those mad assumptions by doing the sensible thing and getting a repayment mortgage. Epic fail in market timing and choice of repayment method.

Winter is coming…

What’s really bananas is that people didn’t learn from the endowment mortgage debacle. Look at this chart from this FCA confidential[ref]I downloaded it on 17/2/2017 from https://www.fca.org.uk/publication/research/fca-interest-only-mortgage-review.pdf[/ref] report published on the open web

Oh boy, there is serious incoming hurt from these maturing IO residential mortgages over the next 15 years

Wages are stagnating, though I guess the high Brexit-induced inflation has reduced all these guys capital debts by 20%. Let’s hope their wages keep up with inflation, eh, because otherwise Winter is coming, and it will be served up with a good amount of Discontent. Their pain will be worse too, because at least I had a deficient repayment method that would have paid about half of the capital. Since then interest only mortgages were written without any requirement to have a method of repaying the capital at the end, so these big cohorts are coming to the end of their 25 year extended home rental term aka interest only mortgage, and the requirement to actually buy the house will come as a bit of a surprise by the looks of it. Okay, so they have taken a call option on the price 25 years ago, but they’ll still need to whistle up the price or move out.