Drew Wagar

Found this rather interesting diagram on the ‘thisismoney’ website. It shows how interest rates have varied since the Bank of England was founded. The last forty years look to have been the most irratic!

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Apologies for another financial post, but it’s topic du jour right now…

A thought occurs. What’s going to happen to all those people who buy a house at the bottom of current price crash when the economy recovers?

Those on fixed rates wont be affected of course, but despite the low BoE rate, the best fixed rates still require a very low LTV to get the best offers. If you’ve paid off lots of your mortgage you might be able to get 2.5%. Typical borrowers are likely to be able to get 4.5% if they have an LTV of 60-70% or so. If you’re higher than 70% you might have to settle for 6.5% – which isn’t great at all.

What about a tracker or SVR mortgage then?

Right now these look ok. BoE rate plus 2.5 or 3.5%. A better deal than the fixed rate. But if the economy recovers, inflation will sore and the BoE interest rate will have to increase sharply.

If it rises back to where it was this time last year, these people will suddenly have a 8.5% or 9.5% mortgage. Not good at all.

This might cause more repossessions than the credit crunch itself…

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You work hard, you save, you pay off your mortgage, you get your gold plated pocket watch and retire. You’re not expecting too much, just a comfortable retirement. You expect a reasonable return on your savings.

Sorry, you’ve been credit crunched.

My last mortgage related post said we were in uncharted waters. We’re past that now, we in ‘here be dragons’ territory.

Interest rates have never been this low before. Not even in the midst of the first and second world war or the 1930s great depression. How did we end up here? No one seems to know what’s going to happen next.

Quantitative Easing is the latest buzzword. The ‘generation’ of £75 Billion worth of ‘new’ money. I’m no economist, but even I can see the dangers of hyperinflation and a run on the £.

But it’s the plight of the savers we need to be worried about now. If you had £10,000 in a pot for your retirement and were getting 6% on it a few months back you’d have been getting £50 a month income from it. At 0.5% you’re getting £4.17. That’s a drop of 92%.

There are 12 Million people in the UK over retirement age, who are depending on their savings. Every single one will have less money at the end of the month now by a huge margin. These people have been made considerably poorer. Many will be wondering how on earth they are going to survive. Even the better off ones won’t be spending.

Trouble is – these are the prudent, the smart, the sensible ones. These are the ones who we need to help the economy back to health. People who have (had) real money (not debt) and previously were able to spend it on a new car, some luxuries, a holiday. Will they be doing that now? Obviously not.

By slamming down the interest rates we have effectively taken almost all of these people out of the economy. They’ll be spending on essentials only – if they can afford those.

What are they going to do? Sensible shoes says don’t spend your equity (savings) as you’re robbing future interest income. But if you need to switch the heater on what choice do you have?

The banks are clearly not going to be lending much more, even with quantitative easing – and the last thing we need is more debt – haven’t we got that message yet?

It would have been better to give the cash directly to people who have a savings balance bigger than their combined debts and tell them they have to spend it this financial year or it will go away again. Bypass the banks, bypass those already saddled with debt and give it straight to the deserving.

Finally a reward for the prudent.

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Well, lucky old Sir Fred. Must be nice to look forward to £693,000 per year for the next thirty years. You’re only 50, and you can comfortably expect to be in rude health for another 30 years, probably more. Nevermind that you were in command whilst your bank collapsed and had to be rescued by public money…

I’d not get on well with this chap anyway. I’ve never been a fan of profits at the expense of jobs and livelihoods. I’ve had my share of downsizes, rightsizes, mergers and acquisitions. They are not fun for the individuals in the middle.

The UK public at large is justly outraged by this chap getting, per year in disgrace and as a pension, a sum of money which most of us will struggle to earn in our entire working careers. It’s outrageous, despicable and the man is rightfully being pilloried by the media. If there is a legal way to get this pension back, lets employ them. To use a word reserved for this kind of behaviour – Fred is the embodiment of egregiousness.

But there are more significant issues here. People seem to be unable to separate the moral from the legal. Witness calls to have ‘retroactive legislation’ brought in to strip ‘Fred the Shred’ of his pension. Wo-ah.. hang on a minute.

Retroactive legislation is never a good idea. If the man was legally allowed to have this pension then it is right and proper he should have it, however morally obnoxious that is. We need to learn lessons from this and stop it happening in the future.

Retroactive legislation could do anything; make it an actual crime to own a car with a big engine for the last 10 years (rather than just a moral one), mean you have to pay make any bonus you enjoyed, devalue your house (even further). I think we’d all call that unfair.

Yes, Fred is an example of the worst that our failed banking system has produced. Yes, of course he shouldn’t be rewarded for failure. It is outrageous that he is paid this extortionate sum. He should give it up/fall on his sword etc…

But… if we believe in a society governed by laws, then we should defend his right to legally draw his pension, as unpalatable as that sounds.

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So now we’re into seriously unknown territory. The UK base rate is now 1%, something that has never happened before. This time last year it was 5.25%. Astonishing.

It’s currently making a big difference to me. My interest payment last January was £873. This January it was £334. (I pay a set fee by DD, so the balance is going to paying off the capital on the mortgage.)

Conversely, my savings offset is not working nearly as hard, £196 saved last January, a mere £98 this January, despite the increase in the savings during the year.

For me, I’m benefitting considerably overall. If I was further on in my financial life and had paid down the mortgage and was a major saver, I would be extremely annoyed, so I can sympathise with the savers and pensioners who are seeing their incomes trashed. If I was relying on my savings as a pensioner, I would have seen a 50% drop in income. Not good.

I’m on of the fortunate ones (for now, assuming I can hold onto my job), but I’m distinctly in the minority with my mortgage arrangements.

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Another interesting twist to the economic crisis today. The government is now prepared to pay the interest on your mortgage for up to two years if you loose your job – to prevent your house being repossessed.

Well, that’s jolly comforting. Your mortgage will effectively be put on hold for two years.

Another billion pounds has been earmarked for this, begging the question of where this money is coming from. The ease at which money is available in a crisis is remarkable. Of course, it’s being borrowed (as I pointed out in my previous blog entry) from our future selves. Whoever is in power in two years time is going to inherit a real tax nightmare. Watch VAT, income tax, national insurance and council tax jump to astonishing new levels, all based on “THE BIG ASSUMPTION” (The economy will return to pre slump levels)

That billion, along with other billions the government is chucking around as if it’s going out of fashion, isn’t being invested, it’s being spent, gone, kaput, lost.

I don’t want to see people loose their houses, it’s got to be a horrible experience; but I am also not much in favour of bailing people out because they have cocked up their financial affairs through knowingly spending beyond their means. There ought to be some kind of acid test which can show whether or not a person is genuinely struggling because of bad luck or whether they should be up for a ‘Darwin Award’.

Of course, no such test is available, and even if it was, there would be some who’d unfairly get caught out on the wrong side. So we have to bail out the idiots alongside the unfortunates.

(My suggestion for the test would be as follows. If you got yourself a >= 100% or self certified mortgage without proof of income – no assistance.)

In other news, apparently houses prices are almost back to where they were in 2003, which is rather ironic given that I bought my current house in 2003. If true, this means that the equity I did have at this point last year has shrunk by around £50,000.

Just as well I didn’t spend all that non-existant money then.

Interest rates look set to come down again this week. I noticed on my last mortgage statement (I’ve got a BoE based tracker rate) that 56% of my mortgage payment was going on interest in October. In November this had dropped to 46% and will drop further if the interest rates come down. Assuming I can keep my job (the other BIG ASSUMPTION) this will allow me to pay off my mortgage faster. This will allow me to afford the big tax rises that are coming down the pipe…

I finally sorted out my Christmas lights last night, buying a £19.99 set from B&Q. Due to the VAT cut it only cost me £19.54. Wooo! It’s vaguely interesting to see that retailers are giving the VAT cut as a ‘discount’ rather than re-pricing everything in store – I guess it’s cheaper that way.

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I’m usually an optimist. My glass is either half full, or the glass is too big.

I’m no economist, politian or expert in such things. However, I can do maths and my gut instinct is generally reliable. This whole economic mess we ’suddenly’ seem to be up to our eyeballs in worries me enormously.

There are some eyewatering numbers. 1 Trillion pounds of public debt, VAT coming down to 15%, 3 Billion capital spending brought forward, a new high band of tax at 45%, National Insurance tax rises… we’re really in uncharted financial territory here.

At a personal level, financially, I’m extremely risk averse. My parents struggled through the 1970’s oil crisis, and the early 1990s interest rate explosion. Times were hard. Even when I left university in 1992, it was hard to get a job. I’ve been made a redundant a number of times. Lessons observed, learnt and taken to heart. Don’t live on the edge, don’t borrow beyond your means, have a safety cushion for when (not if) trouble looms over the horizon.

I don’t take my salary as a ‘given’. I have plans and money in place to cater for a ‘worst case scenario’. I think I could last a year without a job, hopefully giving me plenty of time to take mitigating action.

My mortgage is less than 2x my salary, I overpay and aim to get cut it down to ‘insignificant’ as soon as possible (Why? Because it’s a liability, that’s why!). It’s my only debt. I drive a nine year old car. I haven’t been tempted to indulge in ’spending my equity’ as so many seem to have done.

It appears our problems boil down to “I want it now, but I can’t afford it, so I’m borrowing from my future income in order to have it now.”

This makes the big assumption that the ‘future income’ will be there to repay the debt, and that you won’t be needing your future income for something else by that point.

As you reflect on your life to date you realise you’ve made some stupid mistakes in your time. As a late 30-something, I could give my late 20-something self some extremely good advice.

As a late 30-something, I would love to know what my late 40-something would be saying to me right now.  Unfortunately, given the lack of a time-machine I’m out of luck, however I can shrewdly think of what my priorities will be around that time.

1. My kids will be leaving school (Cars, house, Higher education)
2. I’ll be looking to downsize my working time and spend more time at home
3. I want the mortgage paid off
4. I need to be chucking more money at my pension/savings etc etc.

According to my bank’s figures, I could go out and write a cheque for £100,000 and spend it on anything l like tomorrow. Most of it is ‘equity’ in my house (even though house prices are coming down). I could probably  borrow a further £50,000 without too much trouble.

So I could go out and buy that Porsche now, gut the house and redecorate - but that would completely screw up my ‘future self’. I have spare money now, but I need to consider my 40-something, 50-something and 60-something counterparts.

And this is my problem with the situation facing the wider economy. It’s ’short termism’. We’re doing exactly the same thing. Borrowing from our future selves in order to have stuff now.

We seem to be under the impression that we need to ‘restore’ the economy to the state it was in a couple of years back. There seems to be little realisation that we’ve been living beyond our means as a nation and as a planet for too long. We’re going to undergo a period of recession, in order to get back to a ‘normal’ position. If we try to get back to where we were, we’re going to make it worse in the long run rather than better.

If you look at the classic ‘bad news’ scenario, you go through various stages. Shock, anger, denial, realisation, planning and recovery. I think we’re still in ‘denial’. I don’t think people have yet realise that we’re not going to get back to what they think is ‘normal’. All that credit, all these stratospheric house prices, spare money to buy 42″ plasma tellies, iPods, a new car every three years - that’s the real aberation. Normality is (or should be) replacing stuff when it breaks, not when you get bored with it. Buying stuff when you ‘need’ it, not when you ‘want’ it.

We need to realise the “Buy now pay later” days are over.

Borrowing to get out of debt? Borrowing from our future selfs to spend now? Reducing taxes only to put them up dramatically in a few years time? Expecting us to start spending more when we’re facing increased job insecurity again?

I can’t base this on anything solid, but my gut instinct is really telling me that our future selves will not be thanking us for what we’re doing now.

It’s an uncomfortable thought, but part me of me wonders whether or not a deep recession might not actually be a bad thing in the long term. It might shatter the illusion that many of us are under.

My grandfather would have said, “Batten down the hatches and prepare for winter.”

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Barclays has dropped their BBR to the same as the Bank of England. So I now have a mortgage under 4% – result!

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