[EDIT 11/11/13: As pointed out on the Money Saving Expert forum which I provided a link to at the end of this post, I got it wrong about interest rates offered by banks/building societies being based on inflation – there are a number of factors including the base rate set by the Bank of England (although this is partly based on government targets on inflation). The title wasn’t particularly good either in talking about “age discrimination” because it is only rational for lenders to discriminate against older people on the basis that they may die before they have repaid their mortgages. However, Watchdog reported that maximum age limits for mortgages to be repaid had been reduced by 10 years by many lenders after the credit crunch, irrespective of ability to pay back, but failed to explain why (which is what I gave an explanation of in this post). I have had very few views of this post in five days according to the blog statistics facility, despite it being the top item on the blog, possibly due to the bad headline. Laura Kuenssberg on ITV News at lunchtime today reported that 2,384 mortgages have been applied for using Help to Buy (there is a separate one for new build properties – search online if you want details) out of 60,000 in total – a drop in the ocean and certainly not worth risking the housing bubble which there is already evidence of.]
This evening’s BBC programme Watchdog (viewable at BBC iPlayer) started with an item about age discrimination in the mortgage market with many lenders reducing the maximum age the mortgage needed to be paid off, often by as much as 10 years. They pointed out that this was due to the 2007-8 credit crunch, but argued it was irrational since it didn’t take into account whether pensioners would have the finances to pay the mortgage off and because people are living longer than ever before. This leaves the question of “Why?” – banks are motivated by maximising profits and they wouldn’t impose these arbitrary limits without good reason!
I immediately smelt a rat when an example was given of how much it would cost to pay back a fixed rate mortgage for 5 years at about 2.5%. The whole point about these fixed rates is that they only last for a limited time and shoot up to a variable rate (based on inflation) after that to compensate (and that there are high early settlement fees to compensate if borrowers end their mortgages early so that the bank gets their money back in that scenario too). Obviously, 2.5% is such a low rate that it is completely unsustainable in the long term!
There are three massive risks to entering the mortgage market at the present time, particularly for older people.
Firstly, the very low interest rates the banks pay to borrow from the Bank of England due to quantitative easing (QE) will almost certainly come to an end in the near future, which is likely to send inflation shooting up considerably.
Secondly, the values of pensions and savings are being considerably undermined while QE continues due to extremely low interest rates, so even if people currently working can theoretically afford to pay back mortgages for 10-15 years after they retire, based on private/employer pensions and the basic state pension, they may well not be able to in practice.
Thirdly, house prices are rising rapidly in some parts of the country, particularly in London, and many financial analysts are predicting that there is a massive housing bubble that will burst at some point in the not too distant future. As has happened before, this will leave many homeowners in “negative equity”, where the value of their home is less than the outstanding value of their mortgage.
The ConDem coalition government’s “Help to Buy” scheme, previously only available to new-build properties (that would at least have had the sensible effect of helping to revitalise the construction industry) which the Tories brought forward as a panic response to Labour’s 20-month energy price freeze plan announced at their conference a week earlier (in September 2013), under which first-time buyers will only need to find a 5% deposit (with the government guaranteeing another 15%, or 20% for new build that had already been announced), is already causing a huge surge in house prices in London, to add to prices already inflated considerably. This is particularly dramatic because Help to Buy is available for homes worth up to £600,000 (obviously due to the Tory leadership being eager to help their rich friends).
So now we come on to the reason why banks discriminate. If someone is unable to pay back their mortgage, and he/she gets into negative equity and has his/her home repossessed and sold at a knock-down price at auction, that person would go bankrupt and still owe money – and if he/she is a pensioner, the bank (or building society) would probably never recoup the money.
NB: I was unsure about what happens when people get into negative equity under the Help to Buy scheme and houses are repossessed, so I have just posted a message to the Money Saving Expert forum asking about that. I have already been informed that the government has the right to chase up borrowers if it has any losses but probably won’t do so. Click here to view that thread in the forum.