A LITTLE NEST EGG

[Stanley]

A LITTLE NEST EGG

30 September 2002

Anyone who is currently paying for their house with an Endowment Mortgage will know that the little nest egg they have been expecting to pay off their mortgage isn’t necessarily made of cast iron, many of them have shrunk to the point where they will not pay the debt off. If you’ve got one of these financial instruments and you don’t know what I’m talking about it might be a good idea to take advice and find out. A recent estimate of the possibility of up to £15 billion being claimed in compensation for mis-selling these policies flags up the size of the problem.
The main thing that seems to be clear about these mortgages is they were so complicated that the people who took them out, quite often young people buying their first house, didn’t really understand what they were buying. The nice man who was selling them their mortgage told them that when it matured the policy would pay the mortgage off and leave them a tidy sum extra as a bonus. So, being trusting, they signed on the bottom line. The problem seems to have been that what the nice man should have said was that the final payment depended on what interest rates were going to be in the future, the profit wasn’t guaranteed. He also didn’t tell them about the nice little sum he was earning in commission by selling this particular form of mortgage. I find this all very sad and I sympathise with anyone who has found themselves in this position. It seems to me that things used to be a lot more simple.
Many years ago, in the days when my beard was black, I wanted to buy Hey Farm, behind the Dog, from Sailor Brown. It was going to cost me £2,200 and I hadn’t any money. I went to the Council for a mortgage and they wouldn’t give me one on the grounds that the property was too old and I wasn’t earning enough money. Very disappointed, I had a word with my bank manager, Mr Batkin, at Lloyds in Burnley. There was no complicated paperwork, no beating about the bush, he said that he would lend me the money if I assured him I could afford to pay £15 a month out of my wage. I was earning just over £30 a month and I said yes. He gave me the loan as an overdraft and I paid it off, it was as simple and as hard as that. In case you’re wondering about my seeming to be sexist because I have not included my wife in this story, this was because the account and the risk were in my name and as soon as I made the last payment I went to the solicitor and put the farm in both our names.
Ernie Roberts once told me that he saw a house as he was walking up to the mill one day. It had a sign in the window, ‘This house for sale’. He went to John Capstick who owned it and asked how much it was. 20 Townhead could be bought for £500 but Ernie didn’t have this much so he offered to pay £2 a week ‘Rental Purchase’ as it was called then. Once the £500 was paid off, he paid John the interest that had accrued.
In both cases, the house was the guarantee for the loan. If the borrower defaulted the house became the property of the lender and they could sell it to recoup any money they were owed, the risk was with the borrower and it was a good incentive to work. This meant that there was no question of additional life insurance policies being obligatory because the lender wasn’t really bothered if you died or not, he would get his money back! The term ‘Rental Purchase’ will ring a bell with many of my older readers because it used to be a common way of buying a house, it was a private arrangement and no commission was paid to anyone. Everything was above board and crystal clear, even I could understand it! My question is, what has changed?
In my case, the loan from Mr Batkin, the biggest change is that there isn’t a bank manager in Barlick or anywhere else for that matter nowadays who has the power to decide whether to give a loan or not simply on his assessment of the character of the person who is asking for it. Ernie was similarly assessed by John and evidently regarded as a good risk. Being a realist, and perhaps even a cynic, I think that there other reasons as well. In simple transactions like these there was no opportunity for fat commissions or selling extra policies like life insurance. The paperwork was almost none existent, all I had to do was sign a paper that said that Hey Farm was a charge on the overdraft. We have lost our innocence now and the providers of mortgages seem to erect massive defences made of documents to cover themselves. How many of these pieces of paper covered with fine print are for the benefit of the borrower?
This simplicity survived in other areas of business. When I worked for Richard Drinkall who was a cattle dealer at West Marton he would buy up to 300 cattle a week without a single invoice or receipt. Every deal was done on a handshake and the only bits of paper were bank notes and cheques, the whole system was based on knowledge of the customer and trust. I don’t know whether this could happen today. I suspect it could, but the accountants and tax people wouldn’t place the same amount of trust in their own judgement or their client and so would demand masses of paper as a safeguard. It’s all a bit depressing isn’t it. I seem to be arguing that honesty and trust aren’t of any value in business today. I hope this isn’t true but I have a sneaking feeling we have lost something somewhere along the way.

30 September 2002