UK lenders push too far this time

In Shakespeare’s era, moneylenders had a real image problem. As witnessed in the popularity of the play, The Merchant of Venice at the time – a play in which the evil money lender, Shylock intends to exact revenge on the poor Antonio, only get his own comeuppance at the end of the play. Today, global branding, image make over and our incessant need to borrow capital have changed our views towards the moneylenders. But over the next few months this may start to unravel.

The Financial Times of London refers in an article by Lucy Warwick-Ching to the beginnings of a PR campaign by lenders to encourage extension of debt to be ‘visited upon the heirs of the borrowers’ – excuse our vain attempt at Shakespearian. As we all know, the world is awash with cash to lend, the problem is that most people are already overextended in borrowing, so the lenders now have to find new routes to encourage more debt. Cue, lots of pondering in the bars of Soho sipping Caipirinha’s – answer let’s get ‘them’ to borrow more regardless and convince them that their children can pay off the debt.

So now you have it, the beginnings of a campaign by various lenders to convince, you the public that it all right to pile on the debt, as your hapless children can worry about it when you’re dead and buried. There’s even a catchy name given to the product – Inter-generational mortgage – sounds kind of nice homely and inclusive.

But beware; the Inter-generational mortgages are a most powerful evil.

But according to Financial Times – … Charcol, the mortgage broker, is predicting a change in borrowing culture as people try to cope with the trend of house prices rising in excess of earnings. It warns that as prices continue upwards the only way that repayments can remain affordable is by paying loans back over longer terms of more than 50 years.

Kent Reliance Building Society this week launched a mortgage allowing consumers to pass on their home loans to their children or other beneficiaries on death. In theory, homeowners will never repay any of the money borrowed to buy their homes, as the mortgage works on an interest-only basis.

Virtually all-independent financial advisors would strongly caution against this kind of borrowing – it works well in a high inflation environment, where the capital owed becomes a small part of the total capital worth over time. But in a low inflation environment the original capital owed never really becomes anything other than that. So your debt doesn’t decrease over time. With Central Banks across the world focused on the minimization of inflation as the number one priority don’t bank on inflation to get you out of debt.

The article then goes on to outline the most heinous element of this kind of loan – you don’t need to service the debt because – your children will be left with it – thanks Mum and Dad, as if student loans weren’t bad enough!

Worse still the article then goes on to ‘sell’ the idea to us as not being too bad because the Japanese and the Germans have been doing it forever – yes that’s the same Japanese and Germans whose house prices are still worth less than ten years ago.

… Such arrangements are common in other countries including Switzerland and Japan but have gone on sale in Britain this week for the first time as buyers struggle to get on to the property ladder and parents look for new ways to help them.

Peter Bolton-King, chief executive at the National Association of Estate Agents, said: ‘The UK is starting to go down the same path as Japan where house prices became so high that 100-year mortgages were needed to pay off the loans.

The Council of Mortgage Lenders was not surprised by the inter-generational mortgage. ‘We’ve already seen shared equity schemes and guarantor mortgages, and we expect lenders to come up with other new products to try to help first-time buyers given current affordability problems,’ said Bernard Clarke, of the council.

To add final insult to injury we are then told that this is a smart way of avoiding inheritance tax (IHT).

… The loan has been touted as a way of eliminating in-heritance tax, which is levied on estates above £285,000 after debts have been subtracted. The theory is that a child inheriting a £400,000 house with a £150,000 mortgage would not pay inheritance tax because the value of the estate would be £250,000, below the current IHT threshold.

This is just drivel, if you inherit a £400,000 pound house then, sure you’ll pay tax on the £150,000, but you’ll still get the extra £90,000 after tax – making you £90,000 better off!

Our fear is that over the next few months, as lenders find fewer borrowers, we’ll be subjected more and more to this kind of influence from the smart PR people sipping their Caipirinha’s. In straightforward, commonsense terms it does not make sense.

Once again we see signs of the market turning, encouraging this kind of lending is not just irresponsible, it is also a sign that the lenders market is getting worried.

We suggest that this kind of PR or Marketing of these kinds of loans to the ill informed and desperate is nipped in the bud, now. Otherwise the lending market will be saddled with the same reputation it had in the days of Shakespeare – even today being called a Shylock isn’t considered a positive thing.