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Dave Beans

Is The "mortgage" An Outmoded Concept?

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...as we no longer have a "job for life" any more...Does taking one out still make sense?

It certainly makes it very risky, especially if you push the ratios. Modern job insecurity is a very good reason to overpay loans and not to borrow too much, and if everyone was sane that is what would happen. Unfortunately, houses are priced at the margin, and the margin is populated with financial illiterates and idiots.

If you think about it, everything is driven by idiots and the venal. For example, you wouldn't need draconian Health and Safety regs. if it wasn't for idiots and people willing to take unreasonable risks with their employees lives. We truly live in an idiocracy.

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...as we no longer have a "job for life" any more...Does taking one out still make sense?

Definitely. It qualifies you for benefits when you're out of work. Just don't save anything (except in a pension) unless you're confident you'll remain self-sufficient regardless of your employment prospects.

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Its a very good question, and I believe that it is one of the 'deep' reasons why banking no longer works like it used to.

Its very different lending to a man in the 1960's when good jobs were plentiful, your average job paid good money that could support a family, and his own job was secure and had many benefits. The risk to the bank is low.

Fast forward to 2011 and good jobs are rare. Its essentially impossible to jump careers if the career you are in goes downhill for making money. A wall of credentials stands in the way. So you end up lending to people like contractors. They have a few high flying years, then might make nothing for 2 years.

This is not a risk the banks can easily account for. As we are in a different type of economy than has existed for the past few hundred years.

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It certainly makes it very risky, especially if you push the ratios. Modern job insecurity is a very good reason to overpay loans and not to borrow too much, and if everyone was sane that is what would happen. Unfortunately, houses are priced at the margin, and the margin is populated with financial illiterates and idiots.

If you think about it, everything is driven by idiots and the venal. For example, you wouldn't need draconian Health and Safety regs. if it wasn't for idiots and people willing to take unreasonable risks with their employees lives. We truly live in an idiocracy.

Yet we are 'the best educated generation in the history of our nation'.

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one difference is that back in the days of the 25 year repayment mortgage with 5% interest rates and loans of 3 times income - nobody scaled the 'property ladder' unless they were in an incrementally paid 'professional job'. You bought your semi or terraced in your twenties, relied on one income, did not mew, remortgage etc and at the end of 25 years you received the deeds to the house you often still lived in and 'had a party'.

would agree that this is now 'old fashioned and prudent and impossible' in today's financial climate which probably means the 25 year mortgage is also outdated. so what can it be replaced with ? (a genuine question)

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It certainly makes it very risky, especially if you push the ratios. Modern job insecurity is a very good reason to overpay loans and not to borrow too much, and if everyone was sane that is what would happen. Unfortunately, houses are priced at the margin, and the margin is populated with financial illiterates and idiots.

If you think about it, everything is driven by idiots and the venal. For example, you wouldn't need draconian Health and Safety regs. if it wasn't for idiots and people willing to take unreasonable risks with their employees lives. We truly live in an idiocracy.

I personally think it's a massive risk...I think the main plan is that if you pay a mortgage off within 10 years, it's possibly a risk worth taking..You effectively have to make a financial provision, each month for 30 years, no matter what your financial status. Miss a few payments, and everything goes proverbially tits up..

I just find job security / 30 year mortgage totally incompatible with each other...

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Its a very good question, and I believe that it is one of the 'deep' reasons why banking no longer works like it used to.

Its very different lending to a man in the 1960's when good jobs were plentiful, your average job paid good money that could support a family, and his own job was secure and had many benefits. The risk to the bank is low.

Fast forward to 2011 and good jobs are rare. Its essentially impossible to jump careers if the career you are in goes downhill for making money. A wall of credentials stands in the way. So you end up lending to people like contractors. They have a few high flying years, then might make nothing for 2 years.

This is not a risk the banks can easily account for. As we are in a different type of economy than has existed for the past few hundred years.

Of course, if they had stuck to only lending 3x single income, the risks would have been a bit lower..

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The product itself is not outdated and still essential. What is outdated is the mechanics.

I believe a Mortgage should exist based on 4 core factors.

1) Fixed interest rate and fixed repayment amount.

2) A minimum and maximum lifespan of mortgage (20-35 Years: Age restricted)

3) the ability to stop payments when in financial difficulty and extend mortgage term within predefined bands (20-35 years)

4) Mortgage is portable, it can be moved from property to property but not increased. It is a mortgage for life.

Here is how it works.

You borrow £150k and the Interest is fixed. Repayment is baased on 20 years (no flexibility),. therefore you have a fixed monthly payment and if all goes well you have 20 years to pay off mortgage.

However given Job uncertainty, you may have 2 periods of unemployment. In each case you take 8 months payment holiday. These 16 months plus one for additional accrued interest are then added to the term so now it is a 21 year and 5 month mortgage. If after a period of unemployment you end up with a better job you can pay down the missed payments only, say to 20 years mortgage.

If you need to move house, or upgrade, you can only take your current mortgage with you. This means you use the equity in your house and your savings to upgrade.

Mortgage therefore becomes a much reduced and leveraged financila burden, becomes flexible, can not MEW or remortgage so encourages stability in House Prices. As you have to save up for new or bigger houses it reduces inflationary pressure to that linked with wage price inflation only!

Much better idea.

N

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It certainly makes it very risky, especially if you push the ratios. Modern job insecurity is a very good reason to overpay loans and not to borrow too much, and if everyone was sane that is what would happen. Unfortunately, houses are priced at the margin, and the margin is populated with financial illiterates and idiots.

If you think about it, everything is driven by idiots and the venal. For example, you wouldn't need draconian Health and Safety regs. if it wasn't for idiots and people willing to take unreasonable risks with their employees lives. We truly live in an idiocracy.

We truly live in an idiocracy.

no. we live in a Kleptocracy. the means of the wealth distribution - to the political elites - is via fiat money. and the problems you outline in your post are just some of the symptoms. people are not behaving irrationally, they are behaving perfectly normally.

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I think with the massive income ratios and high prices we have now a mortgage is a pretty ridiculous concept, yes.

Especially the maxed-out loans people had been taking on through the boom - basically leaving themselves a broken boiler away from financial meltdown.

Many people I know are giving up on the 'job' now, as they tend to pay so low. I'm one of them. There was no greasy pole to climb in my work, I hadn't had a pay rise in three years, and yet my workload was leaving me shattered. After tax, my weekly wage was actually a complete joke - I'd have rather earned even less but had less stress. But if I did a little freelance work on the side a project that may only take a day or two would pay more than a week's work in the day job.

As soon as I was regularly being prevented from accessing freelance work by the day job the decision to not have a 'job' was a no brainer.

The lack of so-called 'security' got me out of a rut and boosted my energy. I didn't need so may crisp shirts and ties or jackets so could exists in my favoured jeans and tees much of the time. Didn't need to drive so much. Plus as I only spend the equivalent of 2-3 days a week max doing what I would call 'hard work' (writing business emails on the sofa doesn't feel like work really) I have space to do hobby businesses too, like peddling stuff on eBay, Gumtree and the like.

A mortgage, so long as there's still something for the self-employed around these days, wouldn't be bad but I love my low cost lifestyle and the idea of 'maxing out' each month make me queasy.

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We truly live in an idiocracy.

no. we live in a Kleptocracy. the means of the wealth distribution - to the political elites - is via fiat money. and the problems you outline in your post are just some of the symptoms. people are not behaving irrationally, they are behaving perfectly normally.

I did mention the venal.

It is a combination between the two. The kleptos couldn't hand out 8x mortgages if the idiots didn't lap them up.

I take your point about people acting rationally though. Given the environment, the most rational thing to do financially is to identify the bubbles as they form and jump from one to the next. There is no point "investing" in any reasonable sense of the word.

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What about self-issued mortgages.

If you have the deposit you can then issue yourselves with 4x the amount of credit to buy the house with.

You can then pay off the credit with real money over your lifetime. If you choose not to or cannot then the outstanding debt is removed from your estate.

Obviously this sounds ridiculous but I actually think it is more sustainable then the current system!

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This would be why banks like BTL mortgages. Tenant lost their job and can't pay? Boot 'em out and get in another one. Or Tenant lost their job and housing benefit covers the rent indefinitely? Sorted. A person relying on a single income with a mortgage to pay, well there's time limited SMI but that may not cover the full cost of repayments during that period anyway.

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Mortgage means "death pledge" in French!

I don't think mortgages are worth the stress in the current economic climate. Do we know what the future holds over the next twenty years? No chance! Oil could run out in that time .... owning* a house will be the least of our worries then.

(* you don't own something until you've paid for it .... imagine that :o)

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Its a very good question, and I believe that it is one of the 'deep' reasons why banking no longer works like it used to.

...OO lending by High Street Banks only started in the late 80's ...before that it was mainly Building Societies who provided mortgages to the man in the steet...and then you had to have a savings record with that Society before you were approved based on your income and savings / deposit...and then.... you went into a queue for the release of funds which could take months....the Banks came into the picture from around 1988 and started 'pile them high' supermarket style turnover for mortgages which accelerated around year 2000 due to securitisation and this inflated prices as we know beyond the realms of reason.... except Gordo Brown though it was his economic miracle .....that was when we were finished .... :rolleyes:

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Mortgages are priced for sale to attract investors who seek fixed income investments. There are many kinds of bonds available, and mortgage rates (yields) rise and fall with those competing investments to a greater or lesser degree.

____________________

2012 Diary

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I think the issue is wider even than mortgages

What we have is a nineteenth century social structure running 21st century technology- and the mismatch is showing itself in a number of ways.

We have accelerated job insecurity which seems to be drifting toward a 'just in time' employment model where employers take on staff when needed and drop them when not.

Yet our debt arrangements seem still based on the 'jobs for life' model that for many is disappearing.

We have increased unemployment and fragmented employment due to outsourcing and technology- yet we insist that those impacted are just 'lazy' and complain about the failure of the 'work ethic' rather than offering realistic retraining for them.

We have a class based education system that is firmly rooted in the last century while competing nations run rings round us in terms of educating their own kids.

The UK looks increasingly like an old granny bewildered by the accelerating pace of change and unable to shake off the social norms of the past that now have become liabilities.

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...as we no longer have a "job for life" any more...Does taking one out still make sense?

Compound interest; paying interest on interest, is the greatest legalised con ever perpetrated upon us.

Of course its not going to end.

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The product itself is not outdated and still essential. What is outdated is the mechanics.

I believe a Mortgage should exist based on 4 core factors.

1) Fixed interest rate and fixed repayment amount.

2) A minimum and maximum lifespan of mortgage (20-35 Years: Age restricted)

3) the ability to stop payments when in financial difficulty and extend mortgage term within predefined bands (20-35 years)

4) Mortgage is portable, it can be moved from property to property but not increased. It is a mortgage for life.

Here is how it works.

You borrow £150k and the Interest is fixed. Repayment is baased on 20 years (no flexibility),. therefore you have a fixed monthly payment and if all goes well you have 20 years to pay off mortgage.

However given Job uncertainty, you may have 2 periods of unemployment. In each case you take 8 months payment holiday. These 16 months plus one for additional accrued interest are then added to the term so now it is a 21 year and 5 month mortgage. If after a period of unemployment you end up with a better job you can pay down the missed payments only, say to 20 years mortgage.

If you need to move house, or upgrade, you can only take your current mortgage with you. This means you use the equity in your house and your savings to upgrade.

Mortgage therefore becomes a much reduced and leveraged financila burden, becomes flexible, can not MEW or remortgage so encourages stability in House Prices. As you have to save up for new or bigger houses it reduces inflationary pressure to that linked with wage price inflation only!

Much better idea.

N

20-35 year mortgages and they are less of a burden?

Really nice that the unemployed then get better jobs so can pay the mortgage off quicker.

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They make mortgages illegal and force all house purchases to be cash only.

Consider two scenarios:

1. A young person rents a house off an old person while saving cash to buy his own place outright in the future.

2. A young person rents money off an old person (a mortgage) while paying off the principal so he will own the house outright in the future.

They're not all that different in an abstract sense. Financially the main difference is that scenario 2 is much more tax efficient because imputed rent isn't taxed in the UK while rent is liable to income tax. The benefits system is also much more generous to somebody with housing equity than somebody with an equivalent amount of cash in the bank. These structural injustices could be fixed by a government that cared.

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It certainly makes it very risky, especially if you push the ratios. Modern job insecurity is a very good reason to overpay loans and not to borrow too much, and if everyone was sane that is what would happen. Unfortunately, houses are priced at the margin, and the margin is populated with financial illiterates and idiots.

If you think about it, everything is driven by idiots and the venal. For example, you wouldn't need draconian Health and Safety regs. if it wasn't for idiots and people willing to take unreasonable risks with their employees lives. We truly live in an idiocracy.

LOL

nice post

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  • 337 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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