Keith looks back at his family’s ventures in the housing market to examine how we all take risks in our lives.
Early in 1964, my wife and I bought our first house with the aid of a 25 year 90% repayment mortgage (£1,935 !!!). Nobody in either of our families had ever owned a house or had a mortgage before and we were really exploring new territory. We also took out a life insurance policy to cover the outstanding mortgage if and when either of us was to die during the 25 years. A few years later, we moved to a new town and bought a new house. This time we took out an endowment policy to repay the full amount of the mortgage after 25 years – during that term we would pay interest on the debt plus the insurance premiums. At the end of the mortgage term, the policy would mature and the mortgage would be repaid. BUT, it was a With Profits policy and the insurance salesman confidently assured us that the profits over that period could well equal the mortgage value. So, after 25 years we would not only own our house without a mortgage but we would have a cash injection of about the same amount as the original mortgage.
We understood exactly what we were doing. We also understood that there was no guarantee of any Profits at all on the endowment policy, but that history had shown that such policies tended to increase by about 3% pa compound over a long term. We were happy with the arrangement and had no complaints with how the deal was explained or sold to us.
Later on, more moves happened in the normal course of an interesting life, as we moved about the country. In due course, with children and other pressures, the need to economise became real. On one move, we were advised that we could if we wished take out an endowment linked mortgage, where the policy guarantee only covered about 50% of the mortgage, with projections showing that in 25 years time, the profits would so augment that they would cover the full amount of the mortgage, which would thus be repayable out of the policy proceeds.
This made sense to us and we fully understood that the risk was that we would have to find some cash to fully repay the mortgage in the fullness of time if the policy did not perform as well as projected. There was no mis-selling to us and we were knowingly running a risk that we would not be able to repay the mortgage – a risk that Building Societies, in the past, would not have permitted, but in the hectic days of the 70’s property boom was deemed to be not worth bothering about.
After the property price collapse at the end of the 70’s, many, many people had negative equity (outstanding mortgages greater than the reduced values of their homes). Moreover, they discovered that their with-profits endowment mortgages, with guaranteed redemption values far less than the value of the related mortgages, were also performing so badly that they were losing out there as well. Obviously most borrowers did not understand what they were signing up to or said that they didn’t (!). As a consequence the Insurance industry paid out a small fortune in compensation to all those with endowment linked mortgages on the grounds that they had been mis-sold.
Later on, the Insurance industry was again heavily penalised for mis-selling the conversion of occupational pension rights into private pensions. I had initiated such a conversion myself of a very small occupational pension and, in due course, was approached by the FSA (Financial Services Authority) about it. I explained that I had initiated the process myself and was sold nothing by the Company concerned, badly or well. After several months, they insisted that I receive compensation for the mis-selling!
I may or may not be stupid, but I do rather resent the implication by the State that I am invariably so, when it comes to money matters. Actually, I am stupid in these matters, but only when it comes to my judgments, not in relation to my understanding – I do know when I am running risks – I am stupid in that I continue to run them, when they are really too great – but I can read and do understand what I reads. I deserve a slap from those whom I consequently let down – but I do not deserve compensation from my fellow taxpayers!
My purpose in laying myself this little bit bare is to point out that we all take risks from time to time, we all make financial judgments that work out well or badly, but that this is our business – we should not need to be rescued every two minutes. If we don’t read the small print, then that is our deliberate policy and we should face the consequences. There are rogue salesmen about, who deliberately mislead their target customers and they should be dealt with harshly and the victims compensated, but that should not apply to the generality of the populace.
It is fashionable to castigate the Banks (and they certainly deserve censure); we castigate the Greeks for their improvidence in recent decades which explains why they are in a mess; we castigate the Irish Banks and Government for their ridiculous property boom; and so on. But when it comes down to it, very few individuals and families in this country are badly off because of these distant factors – it is their own decisions and judgments that have got them into a mess. And this also applies to the country as a whole.
I was very interested to read (ex Tory MP) Matthew Parris’s article in the Times a few weeks ago, which I reproduce below – he says it so much better than I can:
“We have been paying ourselves more than our efforts were earning. We sought political leaders who would assure us that the good times would never end and we voted for those who offered that assurance. We sought credit for which we had no security and we gave our business to banks that advertised it. We wanted free and better health care and demanded chancellors who paid for it without putting up our taxes. We wanted salacious stories in our newspapers and bought the papers that broke the rules to provide them.
And now we whimper and snarl at MPs, bankers and journalists. Fair enough, my friends, but, as you know, we really are all in this together.”