DEBT seems to have become a way of life. It’s hard to imagine how you would make your way in the modern world without it.
The generation that saved first and then bought is long gone. We exist, normally and easily, with levels of debts that would probably have sent our grandparents, if not our parents, into a nervous breakdown.
The watchword for past generations used to be that they wanted to be “debt-free” when they entered retirement – any financial commitments definitely had to be cleared by then.
Scribble down on the back of an envelope just how much you owe at the moment. The mortgage is likely to be the big-ticket item, but don’t forget the credit cards, the finance on the car and furniture, any buy-to-let mortgages and any personal loans taken out for holidays or just getting by.
Make sure there’s a strong drink nearby when all these amounts are totted up because for many the grand total will be a six-figure sum, perhaps even approaching seven!
Fortunately, debt is only half the story. Today’s UK population has never been so asset-rich, whether those assets are held in property, pensions, ISAS, premium bonds, investments and equities.
Mr Micawber, one of Charles Dickens’ great characters, who appeared in “David Copperfield”, was based on his own father, John, who like Micawber, ended up in the debtors’ prison. Micawber’s approach to life was “something will turn up.”
Yet, the “Micawber Principle” has stood the financial test of time. “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
The “six” for today’s youngsters is six pence in old money, or 2.5 pence in decimal currency. The significance of Micawber’s words is that even a tiny amount of money can have a devastating impact on someone’s life if they do not have the means to repay it.
Fortunately, failure to repay doesn’t mean the debtors’ prison these days; but the consequences can be just as damaging as any black mark on your credit score can follow you round for years, destroying your chances of getting finance or owning a home.
Independent Financial Advisers (IFAs) know the value of a clean credit score, although remarkably no borrowing at all can count against you. Lenders prefer to know that you have a good record of repaying debt rather than you have never had the need for a loan.
One of the issues for today’s older generation is that many find themselves seriously asset rich and even more seriously cash poor – often living in a property with no or little mortgage, worth hundreds of thousands of pounds, and bills arriving with no money to pay for them.
Some foolishly live their final years on the breadline, just to make sure as much of their estate as possible can be passed on to future generations.
Much better to have a mortgage, as long as you can afford to service that loan and the debt can be repaid when the house is eventually sold.
Unfortunately, very few lenders now provide interest-only loans for residential mortgages. And the age limits for mortgages are actually coming down with some lenders, rather than increasing in line with life expectancy, as you might expect!
The combination of a repayment mortgage and a shorter mortgage term makes the cost of new borrowing prohibitive for many. Equity release often ends up as the best option, as well as being the only one. That’s extremely frustrating for those who can afford to pay the historically-low fixed rates, but are excluded because of their age and because they live in the property.
A recent Saga report revealed that almost a million people in their 70s are still paying off their mortgages; that’s one in five and the average debt is around £38,000.
Not everyone in that situation is a willing borrower. Many still have that debt because of the failure of endowment policies to pay off their loans.
As IFAs explain when discussing financial plans and proposals, circumstances can and do change in later life. Sensible planning takes account of those possibilities; it can’t prevent the blow, but can cushion its impact.
One couple bought a Suffolk cottage outright, but felt secure enough to take out an £20,000 interest-free loan to install new windows. Both were in their sixties, but working. The pair was then made redundant and the loan became a burden. Now they have taken out a lifetime loan, which will be repaid when the property is sold after their deaths. “I will never own my house outright again, unless I win the lottery, but I don’t worry because I know they can’t chuck me out of my house now,” said Sue Reavell.
This trend is one of the reasons that lifetime mortgages are gaining popularity in the market. Santander will offer these products from next year. They will allow customers to continue to pay only the interest on their debt until they die. Then the banks will recoup the outstanding loan by selling the property.
Some of the family might be uncomfortable that the property is effectively owned by the bank; beneficiaries would only inherit the balance from the sale once the lender has been repaid.
A Santander spokesperson said: “As a responsible lender, it is right that we consider all options for allowing customers to stay in their homes and we are doing this. The concept is still in development. However, our current thinking is that we would expect interest to be paid, as this is not a forward purchase of a property, and we would need to be satisfied that the borrower could continue to pay the interest.”
The main worry lenders have is that those with interest-only mortgages will be unable to repay the debt at the end of the term. Around 150,000 interest-only loans are due to end every year between now and 2020, with the peak in 2017-18.
It is almost certain that the borrower will not be in negative equity even if the endowment policy fails to achieve its target because of the rise in property values. But finding that little extra – between what the endowment produces and the mortgage debt due – could still prove as difficult as Wilkins Micawber predicted way back in 1850!
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