Mortgages and loans for clever people
Mortgages and loans for clever people
Mortgages and loans for clever people
Mortgages and loans for clever people
From the words of experts and the weight of regulation, you could be forgiven for thinking that mortgages and other loans and investments are financial instruments of terrifying sophistication. Tony Scott strips away the risks and the rhetoric.
Hardly a week goes by without some authoritative financial or governmental voice bleating that we all need to be taught about finance in school. As though finance especially pensions and mortgages is a subject of such baffling complexity that only years of academic study can illuminate it.
Fom the perspectives of market traders, tax accountants, financial engineers and the builders of multi-layered deals, finance repays close-up study. But from the perspective of the individual citizen, I beg to differ.
Finance is not complicated at all.
It's just that the purveyors of finance have an interest in pretending that it is, in order that we should get too baffled to notice the smoke and mirrors concealing a perfectly simple set of propositions and/or a sizeable fee.
Consider, for instance, an investment fund. Any investment fund: your pension pot; a PEP or ISA or TESSA; even a deposit account at a building society.
At bottom, the idea of all of them is straightforward. You hand over your money for a time, and the fund manager uses it to try to make more money either by lending it at a higher interest rate to someone else, or by buying something (typically shares) in the hope of selling it at a higher price later. If the fund manager succeeds, some of the extra money comes back to you in the form of a higher unit value, or dividends, or an interest payment. The rest goes to the fund manager in return for his or her work.
If you add to the fund manager's workload (or the workload of her or his colleagues) by handing over your money in small instalments each month, or by insisting on a guarantee that you'll get all your initial investment back, or by doing anything else to make her job more difficult you have to pay extra. Which means, of course, that you'll get less.
If you make the manager's job easier by letting him keep it for longer, or, in the case of an insurance policy, by agreeing to pay the first 100 of any claim instead of the first 50 you'll pay less. Which means, in the case of an investment, that you're likely to get more back; or, in the case of an insurance policy, that you pay a smaller premium.
Exactly the same principles apply when someone (a bank or a building society) hands over their money to you for a time in the form of a loan or a mortgage.
If you want to keep the money for longer, or pay only the interest, or pay no more than a guaranteed interest rate for a period, or put down a smaller deposit, then you're making the lender's job more difficult.
As a result, the lender will want insurance to cover the extra risk and will also want paying for the trouble of arranging it. So you'll get the bill in the form of higher arrangement fees, or a penalty for early repayment, or a lock-in period, or a higher interest rate, or some combination of any or all of these.
If any fund manager or mortgage lender offers you lots of guarantees... and lets you make his or her job more difficult... and still promises you a cheaper loan or a larger return than you can get elsewhere, then recall two City of London maxims:
There's no such thing as a free lunch.
If something sounds too good to be true, it probably is.
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