Letters to MoneyWeek: In defence of interest-only mortgages

I was very disappointed to read Ruth Jackson’s article “Dodgy mortgages still abound” in MoneyWeek 864. It was a very one-sided article, which seems to be unfairly and unreasonably demonising interest-only mortgages.

For those people who are responsible enough to manage their finances, and who understand the risks involved in the financial products they take out, interest-only mortgages can be a great idea. For example:

1) For people with investments, it can be much more cost-effective to build up investment growth (eg, in an individual savings account) than to repay the mortgage capital. They can either pay the mortgage back in instalments when investment growth has been good for a few years, or repay it all at the end of the mortgage term.

2) It may be more tax-efficient to use the tax-free lump sum from a pension to pay off part or all of a mortgage at the end (and then possibly subsidise retirement income from ISA investments).

3) For those who may want to live in an expensive area (eg, London) for a number of years due to their career, but who intend to move somewhere cheaper in the future, an interest-only mortgage will be much more affordable than a repayment mortgage. It will also probably be much cheaper than renting, and it also has the benefit that any gain in the value of the expensive property over the years can be used as a deposit on a cheaper property later on.

Any excess monthly income can be used to build up investments or pensions, or save for something else. In addition, any subsequent increases in salary over the years could be used to repay part of the mortgage capital once affordable (and if desired).

4) Other people may not want to repay the mortgage capital. For example, they may intend to stay in the property for many years, but then would expect to sell it – eg, to downsize after their children have left, or to move somewhere cheaper, or to move into care in later years.

So it is a shame that interest-only mortgages are now so hard to get, or to extend if you already have one that is due to expire. Magazines such as yours should be doing more to defend the benefits of these products.

AD

Interest-only mortgages may be appropriate for a small number of borrowers who have a very clear plan to repay the capital component of the mortgage at the end of the term. The problem is that many people who take out these products don’t have such a plan and end up in trouble when real-estate markets or lending conditions change, as our article made clear. We wouldn’t seek to ban interest-only mortgages, but we firmly disagree that the typical borrower should ever be prompted to consider one.

A pension crisis for retiring women

State-sponsored financial discrimination resulting in poverty is alive and well in Britain. Grossly unfair financial penalties have been imposed on a certain female age group, and political organisations and unions don’t give a damn.

I was born in 1956. From a very early age I was informed that I would retire at age 60. I have worked and paid national insurance contributions throughout my life. Then a letter arrives approximately two years before I am due to retire informing me that I will not be retiring  after all and I will not receive my state pension for another eight years – possibly longer. No realistic time has been given in which to save funds for an imminent and serious loss of income.

How am I to support myself? Work of course. However, I then face redundancy, as coincidentally did all the women my age in my place of work. Advisers at the Job Centre have explained that employers have a bias against women over 60 and thus it very difficult for these women to get permanent jobs. As a consequence, certain women born in the 1950s are facing real poverty and extreme distress.

Obviously, state pension ages were to increase in a phased programme, but this did not happen. A highly discriminatory and unfair knee-jerk action was taken and no reasonable notice period was given to those individuals affected in order for allow them to provide for themselves. The government should have stuck to the original retirement ages and not victimised this group of women.

JJ

There’s little doubt the process of increasing the state pension age for women has been handled poorly. In 1995, the then-government began raising the state pension age for women to bring it into line with men. This meant taking it from 60 to 65 in stages, to equalise it with men, then raising both in line. The speed of the changes was accelerated in 2011. The result is that the state pension age for women will now reach 65 by November 2020 and then 66 for both men and women by October 2022.

These changes have long been public policy, but the government did not begin writing to the women affected by the changes until almost 14 years after the 1995 law. Some women do not seem to have been individually informed at all until very close to their planned retirement.

However, the government claims that publicity about the changes in 1995 and 2011 means that everybody should still have been aware their pension age was going up. This seems unfair, but there is little chance of them admitting that their mistake will have caused significant problems for many.

The problem with the BMI

In last week’s issue (MoneyWeek 864) Jonathan Compton correctly questions whether body mass index (BMI) should be used as the standard measure of obesity. He is not correct in suggesting it understates for the tall, quite the contrary, because, being proportional height, it takes a very tall man into the obese range whilst his shorter companion of the same proportions would be assessed as of ideal weight.

This, in addition to body composition, is why tall athletes are classified as obese by BMI. As the height of the population increases as it has, so must BMI. That is not to say that the obesity epidemic does not exist, quite the contrary, but the use of BMI to quantify it historically or to compare different populations is fundamentally flawed as Mr Compton suggests.

CC

Yes, unfortuantely our article misstated the way in which the BMI gives an inaccurate impression for obesity for taller and shorter individuals, due to an editing oversight. We regret the error.

Writing to MoneyWeek

MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for information only and should not be relied upon in making investment decisions.

Our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to provide individual investment advice. Please email us at editor@moneyweek.com, or write to us at Editor, MoneyWeek, 31-32 Alfred Place, London, WC1E 7DP.

  • 3handles

    Fully agree with the points made by AD in regard to interest only mortgages. We would not be able to live in London without our interest only mortgage. Difficulty remortgaging now means we will not be able to switch to another mortgage. And the most likely ways to repay (investment performance, inheritance or higher salary) are all unacceptable to mortgage calculators. I am dismayed at the way the system has changed and is now unable to accommodate planning. But I am content that my planning will work out for my family – being well aware, of course, of the ultimate potential need to sell the property in the unlikely event that I am unable to pay off at or before the end through other means

  • mussel

    As an oldie I am amazed that there could be a problem with interest only mortgages. I have one, called a lifetime mortgage. Forget ‘morgage’ and substitute ‘loan’ ,with adequate collateral. It’s a great Rentier scam to deny older people ‘mortgages ‘, on the basis that they’re too old to live long enough to pay it all back if it’s Repayment, so our Bank willl just have to charge you a lot more for a similar but differently named scheme! An interest only loan based on a lien on the asset concerned and a date or event on which the agreement will terminate seems to me to be perfectly viable. As viable as any ten year fixed interest loan with whatever as collateral for example.