Her Majesty’s Government used to rely on secret agents such as 007 to sort out its tricky problems, at least in Ian Fleming’s imagination. But Alistair Darling this week revealed his secret weapon to encourage borrowers to take out long-term home loans. The name is Bond. Covered Bond.
The Treasury says that these bonds, tools that many European lenders use to raise finance, will help UK mortgage lenders to offer cheaper long-term mortgages. It argues that borrowers should be encouraged to lock into 25-year fixed-rate loans to protect them from the payment shocks that millions are now facing as they come to the end of two and three-year fixed-rate deals, as explained on page 6.
The rationale seems reasonable. So reasonable, in fact, that the Government four years ago commissioned a detailed review into how to clear the way for more 25-year deals. Professor David Miles concluded in his review that the main barrier was borrowers’ “mindsets”. They didn’t like the idea of fixing into a deal with a higher rate, while short-term deals with lower rates were available. He had a point. Many lenders offer 10 and 15-year fixes, and several offer 25-year deals, but less than 5 per cent of all mortgage deals are fixed for longer than five years.
Listening to the Chancellor, it seems that a covered bond will help sort this out. But the lenders have already been playing with the Chancellor’s secret weapon. Seven large lenders, including Halifax and Yorkshire Building Society, have already raised €63 billion by using the equivalent of covered bonds in the past 18 months. Bringing in legislation will reduce the cost of setting up a covered bond deal, but only marginally. It is not the secret ingredient for cheaper long-term deals.
Instead, the key is for lenders to make deals more flexible. At the moment, you will be penalised if your circumstances change and you need to exit a 25-year deal. Lenders seem to be responding to this need. Nationwide this week launched a 25-year deal with no exit penalties after ten years. Other lenders will soon follow with even more flexible deals, I’d wager. (Bond was a gambling man, after all.)
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Tough lessons on pension savings lolling in dud funds
The Chancellor’s secret weapon may not be a roaring success, but the Schools Secretary’s announcement on personal finance (PF) education was better. Ed Balls said there will be more room for PF education in the national curriculum. This was greeted with the same excitement as Daniel Craig’s latest outing as Bond, at least by the Money team. Now before we get too carried away, we need to remember that PF education is still not compulsory. It will be taught as part of Personal, Social, and health Education classes. PSHE classes are compulsory, but the finance element is not. However experts say parents can help out. If they want their kids to learn about PF, they should contact their school. I recently received a letter from a reader whose son was taking an equivalent of GCSE in PF, a course run by the ifs School of Finance. He wrote: “It has completely changed his attitude towards money – he has also learned about credit unions (something I had never heard of until he told me).” Proof indeed that finance education can make a difference.
We received a stark reminder this week about just how much more responsibility is falling on individuals’ shoulders. This highlights the need for PF education. More than eight out of ten final salary pension schemes have closed to new members. These schemes offered workers a guaranteed sum in retirement. Instead, employers are now offering schemes where the payout rests squarely on a worker’s shoulders. Those who fail to take an active interest in how their pension pot is being invested could be in for a nasty surprise on retirement.
Some £55 billion of pension savings is currently invested in dud funds, meaning workers could be thousands of pounds poorer each year of their retirement, as we explain on page 12. What is even more worrying is that the numbers of people making any sort of contribution to an occupational scheme has fallen by 500,000 in the past two years. It might be too late for this generation, but the next may be better equipped to make sound financial decisions.
Forget the fake Gucci, the latest accessory is a fake P60
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Fancy a pay rise? Forget the toe-curling meeting with your boss, or even working late every night. The easiest way to get an upgrade in your finances is to order a new P60 online. (A P60 is the annual statement issued by employers which confirms how much you have been paid.) Type in what you would like your salary to be, and you will receive the document within days, as we explain on page 10.
A new P60 won’t increase the amount your employer pays into your bank every month, but it’s good enough if you want to make your ultra-competitive City banker friend choke on his champagne as he catches a glimpse of it. It is also convincing enough to tempt fraudsters to apply for large loans they actually can’t afford. “But my other information for the loan won’t show the same amount as this fake P60,” I hear you cry. No problem, simply order fake bank statements, monthly pay slips and false utility bills too! The websites inexplicably call the documents “novelties”. Lenders are wise to these websites, but it’s time they were shut down.