The moral hazard of being kind to the indebted

Jodepetas

macaque wrote: »

The entire economy has waded in to rescue overborrowed property owners. Anyone living on a fixed income or with a savings account has been subsidising 'the great indebted' for the past 4 years. The rational thing for borrowers is to do is to use this breathing space to pay down their debts. All the evidence suggests they are just not listening.

The 'house prices will rise indefinitely' fallacy has now been replaced with the 'interest rates will stay stay low indefinitely' fallacy.

Come on guys, pay down your debts. Its for your own good (and ours).

cant post link

If it were that easy people would do it, that fact is there are many being made redundant , who have had their pay cut, and plain out do not have the capital to pay it off. it was stupid to lend them the money in the first place.

i8change

Originally Posted by julieq
To be honest, it's financially illiterate to pay down mortgage debt when it's cheap

I pay 2.5% for the Mortgage and get 2.5% on my NS&I ISA.

If someone knows where I can get lots more interest guaranteed I may get off my !!!! and move back out the £16-20k I have overpaid.

I could invest in shares via. the other halves wage/pension scheme at a rate of 8% her, 10% her Employer, but the stock market has been flat for the last 10 years and the future is very uncertain so why rush?

I would have to buy an annuity with the proceeds eventually and be ripped off by an annuity provider. I already have a Final Salary pension due, from age 60, that I can live off.

Is there some great guaranteed fortune I am missing out on or is the above just a sweeping statement?

In uncertain times I quite like knowing I could choose to own the roof over my head outright (via. my ISA balance) and live rent free. The worth of cash, shares or pensions schemes seem such a variable.

AD9898_2

julieq wrote: »

Where does savings income come from exactly Macaque?

Prudent borrowing of money would have been the best way Julie. I can't think of a single thing that benefits from 'over doing it' anywhere in life, as in the short run or the long run, you'll always pay the price.

Unfortunately sustainability is a concept that we humans find very difficult to grasp, of course eventually we will be forced to except this concept whether we like it or not.

silvercar

macaque wrote: »

The entire economy has waded in to rescue overborrowed property owners. Anyone living on a fixed income or with a savings account has been subsidising 'the great indebted' for the past 4 years. The rational thing for borrowers is to do is to use this breathing space to pay down their debts. All the evidence suggests they are just not listening.

Wrong on so many levels.

With interest rates so low, over borrowed is not an accurate word.

Why is it rational for borrowers to pay down their debts when they can borrow so cheap?

julieq

It's not a question of whether you can get parity in interest rates - if you can then that's great but the more important consideration is the illiquidity of housing and the question of what is going to happen to prices. If you believe prices are going to fall then anything you overpay is going to drop in value, and in order to access it if needed you become a distressed seller and nail yourself onto a bad situation. If you can pay the whole mortgage off there's some sense in it - I did that myself - but there's no point in increasing the proportion of a house you own when someone else can still force you to sell it and dictate the terms.

Mortgage overpayment is an emotional step, not a rational step, it's about the illusion of control and a view that debt or borrowing is intrinsically bad (it isn't). At a time when mortgages are cheap, it's hugely questionable. Paying down mortgage debt would be way down the list of anyone approaching the question from a rational level, because there are hugely more beneficial things you can do with the money, including buffering against unemployment.

And let's get the myth that property owners are "overborrowed" into some sort of perspective. What that is is code for "some people borrowed more than I did, were able to repay before the crisis and are repaying now, but I want them to suffer so I can get my own way". There is no evidence in terms of average multiples or default rates that anyone was or is overborrowed. Rates are not - from the research I posted - a major determinant factor in arrears levels (far more important are life changes). The bears trot this "props" rubbish out week in week out, but it's not sustained by numbers, and if you post numbers pointing this out you end up in a silly set of ad hominems. You may not like the fact that some groups - couples in particular - prioritised their life differently and that is squeezing singletons out of the market, but that is how markets work when supply is constrained. Groups with an advantage enter, others are forced out.

Neither have savers been subsidising the indebted. It is the OTHER WAY ROUND, unless you think there's some sort of magic money pot savers are given when rates rise and it's generated from thin air. If you don't lend you can't pay returns to savers. The overblown prudence that's been demanded as a stable door lock is what is cutting returns to savers.

AD9898_2

BTW Julie your first post on here was pretty good, I don't come here too often nowadays, partly because nothing much is happening and partly due to the infiltration onto the forum of more knobheads then decent posters with decent arguments, although I don't always agree with what you say, you definitely fall into the latter category.

kabayiri

The problem with low interest rates is the erosion of savings culture. We can't be the only people who have decided to divert some savings into house redevelopment. Others I know are looking into the BTL market, if they have not done so already.

JulieQ makes an interesting point about the illiquid nature of a house and overpaying on the mortgage restricting your flexibility. This is where products like offset mortgages make more sense. Are offsets popular in this forum ?

JonnyBravo

kabayiri wrote: »

Are offsets popular in this forum ?

Not sure. We have one. Know Really2 and DervProf do as well.

SingleSue

For my parents, the knowledge that whatever happened, they owned their home outright was far better for their sanity than having the money in the bank. It may not have been the most financially sensible move for them to pay off their mortgage early but it was certainly the more sensible one for them mentally.

macaque_2

julieq

To be honest, it's financially illiterate to pay down mortgage debt when it's cheap, at a time when there's a chance of house price falls and the economic situation is uncertain. It is of course classic bear doctrine, but it makes no sense. You're better off building up cash buffers than pile money into an illiquid asset you believe may fall in value, because even if you own half a house it can still be repossessed and on a forced sale you'll get less back than you've overpaid in, whereas if you have cash you can maintain minimum payments for a considerable period.

Using spare cash to pay down a debt is financially literate. It would only 'finanically illiterate' where that cash could earn more elsewhere. Since banks are borrowing at 0.1% and lending at 4-10% your suggestion is clearly nonsense.

It's also a classic bear error to suggest that base rates are low to support the housing markets. It's ridiculous: rates are low in the US and prices are still falling (and before someone tells me that the vogue there is for long fixes, new purchases are at new rates, has had no effect whatsoever because of the oversupply there). Rates are low to stimulate the economy generally and keep people in jobs. Generally unsecured borrowing, for example on credit cards or personal loans, hasn't changed rates substantially, and there's minimal effect on the mortgage rates most people pay because the vogue in 2007 was to fix for a few years, and rates available now are well above BoE base, and so unless you hit lucky and got a low tracker rate you won't have seen particularly good rates (I expect Geneer managed it obviously). Even then it's a bonus rather than a lifesaver.

Interest rates are being held low in an attempt to avert another financial crash. The risk of this crash is directly linked to toxic debt, a high proportion of which is related to property. Low interest rates will only lead to recovery if the toxic debt is repaired and/or wealth creating companies have access to low interest loans. At the moment neither is happening.

I did find a study a couple of days ago which indicated that rates were a very low determinant factor in terms of arrears, and (as you'd expect) unemployment and other life changing events such as divorce were a much larger factor. I think it was on the CML website and made interesting reading. It was a study on whether banks price risk into rates, and the conclusions were that they don't, but that that was for sensible reasons including the fact that poor risks tend to self select lower loans, and charging them more increases risk of default rather than decreases it. Lenders aren't interested in moral hazard, they're interested in getting their money back. Well worth looking over anyway.

The loss of jobs and falling incomes are the direct result of the collapse of an economy which became too dependent on borrowing and spending to create short term jobs.

But even if rates were set to support houseowners, given a roughly 70% owner occupation rate, that would presumably be the right thing to do for the majority? Or are we supposed to be setting economic policy to support a small group of sell to rent parasites who hoped to have their cake and eat it by benefitting from HPI and then hoping to get massive price deflation, and who have been royally thumped?

In the long term, only low prices support homeowers. A parasite is a creature that relies on a host. Describing a person who sells to rent as parasite is an incorrect use of the term. It is a legitimate description however for people who overborrowed and are now dependent on subsidised interest rates for survival. For them however, it is only a matter of time before the flea collar of higher interest rates gives them a royal thumping.

As for savers, there is no absolute right to benefit from piling up your cash without taking risks with it. At some point someone needs to do something risky with it, which includes lending on mortgages, if you want above inflation returns, you have to participate in growth of something or other. It's arguably much more beneficial that people sitting on cash piles fail to get adequate returns, because if you have a situation where everyone makes easy free money without risk, you hit the thrift paradox head on. Money should be made to work.

The risks/rewards of lending should be associated with productive outcomes. Churning property is not productive.

And lastly a word on corporations and profit. Profit, by definition, is money beyond the cost of maintaining an operation and tends to get returned to investors (mostly pension funds). It's actually far more beneficial to general society that corporations make profits and grow, than it is that people save money, because that circulates cash and generates returns.

A churn and borrow economy can only grow until people max out on debt, which they have. To the extent that UK wealth creating companies are growing is heavily linked to the fact that they are shifting jobs and profits offshore.