Exams for first-time-buyers? Makes sense

Should you have to pass an exam before you are allowed to take out your first mortgage? According to the Consumer Credit Counselling Service, the answer is yes.

In a speech last week, Malcolm Hurlston, the chairman of the national debt charity, called on political parties to introduce some sort of training for first-time buyers. “First-time mortgages should be sold not with pretty ribbons and tax breaks, but with health warnings. They should be sold like driving licences, after study and exam.”

It is feisty stuff, and clearly not the kind of thing anyone involved in the selling of mortgages much likes the sound of. Lovemoney.com thinks that Hurlston has “lost the plot” and that the whole plan is “ludicrous”. Why should people be forced to learn about mortgages if they don’t want to know about them, the author asks, particularly when they can just nip along to a qualified mortgage broker who can advise them on what best to do.

This rather misses the point. Buyers should be forced to learn about mortgages because taking one out at all is the biggest financial decision the vast majority of us ever make. And getting one at the wrong time (before we are financially ready or stable enough to buy) or getting the wrong one (say a discounted deal with a reset we can’t afford) can turn out – and often does turn out – to be the worst financial decision any of us ever make. Witness the deeply depressing rise in repossessions over the last few years, and then think forward to how fast they will rise again as interest rates rise. It isn’t nice.
The truth is that homeownership isn’t a good thing for everyone. But if you don’t grasp the basics of the effects of compound interest, if you don’t know how interest rates impact on house prices, and if no one has told you that there are periods in history when house prices have fallen in real terms for decades, then you might not know that. And I really can’t see the average mortgage broker stopping to explain it: their job is not to put you off home ownership with a proper run though of the potential risks to your long term financial well being, but to sell you debt. That’s not really the same thing.
No one is suggesting that anyone should be banned from taking out a big mortgage. Just that they shouldn’t be allowed to do so before they have fully understood the maths behind it and accepted the risk that comes with massive leverage. It makes sense to me.

  • Michael Lewis

    ROFLMFAO, you can’t play Mum to everyone in the country and having an exam is just a barmy idea. Having non-recourse loans and maximum 3 x salary of main earner is sufficient.

    Simply requiring that all new mortgages are non recourse would solve many problems. Bad for the banks, great for the long term health of the economy, provided banks aren’t ‘too big to fail’.

  • Sceptical of Chancery Lane

    I read last week that Hurlston had said that the ‘pre-buying’ Federal education programmes in the US were a good example of what should be introduced, which had apparently been in place since the early ’90s.

    I don’t know if these US programmes were compulsory for all borrowers but, if so, they didn’t seem to be very effective in stopping people borrowing too heavily for houses they couldn’t really afford, in the expectation that prices would inevitably continue to go up.

  • Michael Lewis

    ” ‘pre-buying’ Federal education programmes in the US were a good example of what should be introduced, “

    Slightly more sensible, but an “exam” is just too much, people can’t be treated like little children. That’s barmy.

    If all mortgages are non recourse – it would force banks to lend more sensibly – for fear of going bust. We just need to ensure that we let bankrupt banks go bust, then the message will get hammered home to retail banks that if they lend too much – they don’t get bailed out, they go out of business.

  • Alex

    To extend the logic you should have to sit an exam before you get married, have a child, apply for a job, vote, decide to emigrate, buy a fast car, or use stairs ( which apparently 100,000 people fall down every year )….

    …or we could all just be left alone and allowed to get on with life without ever more “well intentioned” interference from Nanny?

  • Sceptical of Chancery Lane

    @ Michael Lewis – I think that most US loans are non-recourse, but this didn’t apparently lead to responsible, prudent lending. It just means that people are more likely to bail out when in negative equity, which makes a bad situation worse.

  • Merryn

    Alex – in many of the cases you mention above you do have to do just that. If you marry in a church you usually have to submit yourself to guidance from your vicar. If you apply for a job you get throughly interviewed to make sure you are up to it. if you have a child you have to prove to your health visitor that you are looking after it properly and you do of course have to have a license to drive a car….

  • Alex

    All of those are stetching your argument to say the least Merryn. For one you actually don’t have to get married in a Church, many people don’t, and even if you do the CoE is frankly rather more interested in the level of donation you’ll be making rather than giving marriage lessons.

    Yes you are interviewed when you apply for a job….and unless I’m wrong you do have to fill out plenty of forms to prove you have the ability to pay for a house that you’ve decided to buy.

    You need a license to drive a car, I didn’t say you didn’t. But if you decide buy a fast expensive one that will loose 70% of it’s value over 2 years you’re expected to know that, rather than have to sit down and prove you understand the nature of depreciation.

    In none of the cases I mentioned are you required to sit an exam. Which is my point.

  • Michael Lewis

    “In none of the cases I mentioned are you required to sit an exam. Which is my point. “

    A point well made. We’re not -yet- in a communist dictatorship.

    If I want to enter into a commerical agreeemnent with some financial services firm, well, the government … can go $%$£%$£ itself.

  • Merryn

    Ok in most of these case there aren’t formal exams but the point is that as a society we tend not to allow people to do incredibly dangerous things without educating them about the risks first. That isn’t the case with mortgages. The only people advising would be borrowers are those with an interest in them being deeply indebted. Given the level of financial illiteracy in the UK that’s just wrong.

  • Alex

    I just don’t think that another exam, liscense and inevitable fee is going to help much in anycase.

    Neither do I think that buying a house is quite as dangerous as you feel. Houses are not cheap, not by a long way. But at the same time, post correction neither do they seem excessively expensive.

    For many people owning a house and paying a mortgage isn’t any worse than renting. After all you have to live somewhere. And for alot of people there is a very sound logic in paying down a mortgage rather than paying someone elses mortgage for them.

    Bringing me onto interest only and BTL….both of which are largely extinct, and a very good job too. Now that was incredibly deangerous, but I don’t think sitting a test would have deterred the average BTL “property entrepreneur” from there insanely leveraged antics.

    How about a certificate in practical numeracy for all school leavers, as well as a similar certificate in literacy as GCSEs seem unable to provide that?

  • Michael Lewis

    @Sceptical of Chancery Lane
    “I think that most US loans are non-recourse, but this didn’t apparently lead to responsible, prudent lending. It just means that people are more likely to bail out when in negative equity, which makes a bad situation worse.”

    I think it makes a bad situation better: banks are forced to bear some of the risk. It should (provided we allow them to go bankrupt) force them to be less reckless in their lending.

    It also means that repossession is less of a hardship for those that genuinely find themselves in different circumstances and can’t afford their homes.

    It makes the housing market more liquid too – less need to sell a kidney to stay in a home that is over-priced.

    It would force some discipline on lenders – making people take exams before they can spend their own money: it is totalitarian rubbish. It an abhorrent attack on the rights of the individual. It is an idea that should go the way of id cards…