The UK economy is drastically skewed by the effect of the housing market and the obsession with housing investments. Personal experience and some thought has lead to this simple suggestion that will both stabilise the housing market as well as provide for more sensible personal financial planning.
The number one reason in the UK for owning a home is the expectation that it is a sound investment that will increase in value. In the absence of sensible pension provision, the speculative housing investment is supposed to provide the required pension.
So that rather than current taxation providing an equitable pension for all, instead the buyer takes out a long term loan to provide a lump sum to the seller.
Linked to the expectation that housing is such a great investment, the mortgage financial services industry provides very long term loans, typically over 30 years, often interest only with capital repayment linked to pensions or other insurance planning.
This is a huge confidence trick, literally! Where even the main players and beneficieries are taken in.
Restrict the term of any mortgage loan.
Most borrowers do not even realise how much extra they need to pay monthly to reduce the term to twenty, or even fifteen years. They are not encouraged even to consider this option.
| Rate | 30 | 25 | 20 | 15 | 10 | 10.0% | 883.94 | 918.06 | 978.83 | 1095.81 | 1356.21 | 7.5% | 705.54 | 747.58 | 817.43 | 944.06 | 1214.04 | 5.0% | 542.09 | 591.27 | 668.68 | 802.85 | 1079.20 |
I would suggest that fifteen years should be a maximum term.
Only repayment schemes should be allowed.
Why be encouraged to gamble on some other financial policy? It is nonsense. If you agree to borrow money, you should arrange to pay it back - each year you should owe less. Period.
Fixed Rate mortage only!!
I recently heard an advisor propose that since interest rates are so low, they should be allowed to lend increased multiples of income. Well, fine, but only if the interest rate is guaranteed to remain low for the duration of the mortgage! In other words a fixed rate.
Fixing the rate for the duration of the loan also makes sense for any interest rate policy, since this is becomes a very strong signal.
Reducing the mortgage term will make fixed rate mortgages more realisable. With possibly lower rates for shorter terms.
Well clearly it would not be possible to sustain such large house prices. Current prices would fall to reflect the real purchasing power.
In real terms tho', less money would be removed from the economy servicing long term debts, and rather than realising housing equity release, more people will pay off their mortgages earlier, releasing funds for longer term saving.
I was pleased to hear that the UK chancellor Gordon Brown recently asked for an investigation into how the UK could develop a better longer term fixed-rate mortgage market. This is encouraging, tho' without the overall shorter term mortgage regulation and repayment only structures I do not think it will be sufficient.
Such a scheme will also be understandable by most borrowers. Fifteen years is a timescale it is possible to relate to, while thirty to fifty years is not. People will really be able to plan properly.
..and if they feel in control, then they will feel better :-)