Of all the animals of prey, man is the only sociable one.
Every one of us preys upon his neighbour, and yet we herd together.
The Beggar's Opera: John Gay

Wednesday, 18 April 2012

The dead pledge

mortgage (n)
late 14c., from O.Fr. morgage (13c.), mort gaige, lit. "dead pledge" 
from mort "dead" + gage "pledge;" so called because the deal dies either when the debt is paid or when payment fails.

Any blogger knows that timing is crucial, particularly in dealing with the sort of news story you know is just over the horizon. Too soon and you have a damp squib; too late and someone else has got there first.

This looks like being the week the MSM pick up on what they are already calling a 'ticking timebomb' - the question of interest-only mortgages.

In the property feeding frenzy of the late eighties, houses were snapped up as soon as they became available. In some areas, overnight queues formed outside estate agents whenever a new development was released onto the market.

In a competitive mortgage market, the lending vehicle of choice for many was the interest-only mortgage sold with an endowment policy to pay off the final debt; the monthly repayments were lower and there was the possibility of a cash windfall if the a with-profits endowment policy performed well.

Much has been made since of the mis-selling of these policies, but not all lenders disguised the fact that there was an element of risk. However, unwilling to be left behind by rapidly rising prices, people were buying at what would have previously been an absurdly young age with very little capital behind them; this kind of mortgage enabled them to borrow against future age- and experience-related pay increases.

In a scenario now all too familiar from other areas of banking, the earliest investors saw handsome returns; endowment policies maturing in the eighties and nineties provided a substantial windfall that saw homeowners indulging in new cars and exotic holidays - and unintentionally endorsing for the next generation the salesmen's claims that an endowment policy was a worthwhile investment.

That sense of optimism and security was, as we now know, short-lived; repeated and increasingly pessimistic warnings have been issued that the final lump sum will fall well short of repaying the amount owed. What is not known is the extent of the problem; despite all the publicity there will doubtless be people out there who could not - or would not - take steps to meet that shortfall and there is no way of knowing how many they are.

In the next few years, we can expect increasing media coverage of this story - and, more particularly, of the consequences for those unfortunate or imprudent individuals who have no means of paying the debt other than selling their homes. I'm no Mark Wadsworth, but even with my limited knowledge of the property market, I can see this uncertainty could be a potentially destabilising influence in an already volatile situation.

I only hope that the news coverage will not include attempts to solve the problem by other means: regular readers may remember this post from September 2010:
'Reading on in the business section in the darker watches of the night, an interesting thought occurs; endowment policies are linked to life cover. And while PEPs and ISAs bump around in the shallows, endowment investors have been left well and truly high and dry. 
A policy bought in the 80s to cover an interest-only mortgage of £100,000 might now have a projected shortfall of up to £45,000, according to recent figures. With surrender values at an all-time low, the unfortunate policyholders are stuck paying in, with no hope of realising that £100,000 unless one of them dies.'


  1. There will also be a lot of interest only mortgages out there with no backing at all as about 15 years ago lenders dropped the requirement.

  2. This business sends a shiver down the spine. Against all the advice from friends and family I decided to pay off my endowment mortgage early. They thought I was crackers. When the fund I was in tanked three years later I realised how lucky I was having just about paid off the capital.

  3. Antisthenes, true, but those who took out the early ones were led to believe that the investment would clear the debt and let them keep the house.

    Demetrius, I suspect your foresight was the result of your extensive knowledge of the past; perhaps a pre-requisite for entering banking and finance should be an A-Level in political history.