Thursday, 15 November 2012

Ah, those feckless youngsters...

From The Daily Mail*:

Tony and Pam Hughes, a newly married couple in their 30s don't intend to bother paying off their mortgage. And after 30 years of paying interest-only to the bank and retiring, they accept that there will be a shortfall of a quarter of a million pounds.

It will leave them with a terrible dilemma: they will have to move out of the house where they intend to spend the next five decades or take on more costly debt that will devour their children’s inheritance.

Like millions of first-time buyers in their 30s and 40s, they'll probably find themselves trapped. They will refuse to take responsibility and instead will claim that they have been the victim of a toxic combination of financial misfortunes.

Their generation hope to see the value of their homes soar from an average £160,000 to £900,000, an increase of over 500%, which is the kind of unearned, tax-free windfall which the government engineered for their parents and grandparents. But instead of enjoying this paper wealth, many will still be struggling to meet mortgage repayments, will refuse to move home and will still have loans and credit card debts into their 80s.

Last week, a report by the City watchdog the Financial Services Authority (FSA) highlighted that while many young people can’t get on to the property ladder, those who do will be barely clinging on. As a result, it found that it’s not just that young people are most likely to take huge mortgages with small deposits, but they will continue to run up debts for the rest of their lives.

In the case of Mr and Mrs Hughes, they will be stranded because they have taken out an interest-only mortgage. These loans are popular because they allow borrowers to keep their repayments low. However, they are only repaying the interest on their mortgage, but none of the original sum borrowed. Essentially, this means that when the mortgage term ends, they still owe precisely the same amount as they began with.

Tony, now 32, claims this was not clearly explained to him when he took out a £200,000 mortgage last year to buy a three-bedroom house in Tunbridge Wells. He has 28 years left to serve as a Royal Naval officer, and hopes to then be able to settle down with his wife Pam, a hairdresser.

Initially, the couple intended to take out a 100  per cent repayment mortgage. But attracted by the lower monthly payments, they later decided to take out an interest-only loan instead, even though the bank made no efforts to explain to them what "interest-only" means or why the monthly payments were much lower. They also decided that the windfall gain they'll get from owning land won't be enough for them, so have also decided to gamble on the stock market with a 25-year endowment — a type of savings plan — which they were told will cover the debt on their mortgage.

Last week they extended the mortgage to £240,000 — again interest-only — as they intend to buy a new Land Rover Defender for the school run.

Monthly mortgage repayments are £250, but meeting these bills, along with a number of credit card debts, is proving a struggle. To give themselves breathing space and lower payments, they will then extend the mortgage term by five years. Which won't make a blind bit of difference on an interest-only mortgage, but hey, this is The Daily Mail.

"We are at the point when we have nothing left over at the end of each month after essentials — we get bills and are never be sure if we can meet it," says Mr Hughes.

In order to stay in their home after early retirement, they hope to release equity from their property, which they hope will be worth £600,000. Using a company called Just Retirement, they'll be able to get £58,500 at an interest rate of 6.59 per cent. This will clear their second mortgage and give them some extra cash.

"An equity release mortgage isn't really a mortgage, is it?" asked Mr Hughes, "I mean, it's not like we have to pay it back or anything. I'm sure house prices will be rising faster than 6.59 per a year for the rest of our lives so it'll all sort itself out, I guess."

* Thanks to The Stigler for the nudge.


John Tee said... they intend to buy a new Land Rover Defender for the school run.

The obvious choice when you are strapped for cash ...

Mark Wadsworth said...

JT, maybe so, but these "4x4's" are the car of choice for the school run where I live. Even my wife has one. Perhaps it's an Essex thing?

Woodsy42 said...

"Last week they extended the mortgage to £240,000 — again interest-only Land Rover Defender for the school run. "

Then they are complete idiots!
The thing that annoys me is they give a bad name to, and then expect help from, the people who behave responsibly and live within their means.

Hopper said...

I assume you didn't cover the Ken Wheeler sob-story at the end because it was too much like shooting fish in a barrel with a Gatling gun?
Strewth, truly the DM has outdone itself.

Mark Wadsworth said...

W42, the original was a bit more "sob" than that.

H, I did the Hugheses first, I was saving Ken for a real hatchet job at the weekend. He's going to be in his early twenties.