Merryn's Blog

The government's latest ludicrous idea to boost house prices

The government's latest crackpot idea to get young people on the housing 'ladder' is for lenders to offer 'mates' mortgages'. A ludicrous suggestion that could leave you with no money, no home, and one mate less than you started out with.

Are most annuities mis-sold? That depends on your definition. But you could make a pretty could case for it.

How? Simply by noting that the vast majority of people (two thirds) buy their annuities from their pension provider, despite the fact that they could very probably get a much better deal from shopping around. That suggests that they aren't being given particularly good information on their options.

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No-win no-fee legal firm Brunel Franklin thinks that isn't good enough and has announced that it is to bring some test cases of possible mis-selling to the Financial Omsbudsman, says the Guardian.

On what grounds? All sorts. The main one is likely to be that providers have failed to properly explain to clients that they have an Open Market Option (OMO) the right to buy their annuity from anyone they like. Note that in 2008 the Financial Services Authority had a half-hearted go at the industry after noting that 40% of letters send to retirees didn't properly point out how the OMO works.

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But they could also have been sold a type of annuity without the risks properly explained, or they could have been sold an ordinary annuity when their health would qualify them for an enhanced annuity (higher payments for people who are likely to die early). Only 10% of the investors eligible for an enhanced annuity end up getting one.

Pensions campaigner Ros Altman is with the critics on this. "There is an enormous amount of mis-selling of annuities and it has gone on for years," she says. But the trouble isn't just the companies (it isn't in their interest to be honest about annuities). It is the government and the regulator: they "know customers don't understand what they are doing when they buy an annuity, but they haven't done anything to stop it."

That's an interesting point, particularly given that it isn't that hard a problem to solve. According to Tom McPhail at Hargreaves Lansdown, the key thing to do is to simply swap things around. At the moment the default option is buying an annuity from your pension provider. Make the OMO the default option (so retirees get a letter not with quotes from their provider but with instructions on how to shop around) and all of a sudden you will have a properly competitive market.

But pensions aren't the only place where you might be beginning to think that ongoing mis-selling is as much the fault of the government as anyone else. Take last week's ludicrous suggestion from Grant Shapps that lenders should be offering "mates mortgages" to help the young on to the housing ladder (or housing snake).

If Shapps could 100% guarantee that house prices would go up every month forever and that every house bought by mates would sell at any time by enough over its purchase price to cover stamp duty and costs and to make a profit that would be just fine. But he can't.

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Volumes in the market remain very low indeed with any less-than-perfect properties languishing for months and prices are still falling. Halifax figures for June showed they're down 3.5% on last year. If you add in inflation (which the mainstream is finally realising that you should) they are down 7.7% (and that's using the rather more forgiving consumer price index measure).

So buy with a mate now and you may find you and he are together for a long, long time. That's not going to be good for your relationship. But things could be even worse for you if your friend isn't the patient type: if he defaults, the lender is allowed to chase you for the repayments. Then you'll be down a mate, a bank balance and a credit rating. And wishing that you'd ignored Mr Shapps and just waited for prices to fall and the mortgage market to free up before you tried to buy a house.

Getting the wrong annuity might make your retirement less than it should be. Ending up stuck in negative equity with a friend you grow to hate is likely to be a great deal worse. If I were Mr Shapps I'd start thinking about how so many bad recommendations end in mis-selling cases before I started interfering in the mortgage market.

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