What caught my eye this week.
There’s a story in ThisIsMoney about what’s apparently the first-ever retirement interest-only mortgage that’s ‘fixed for life’:
The over-50s deal from Hodge features a fixed rate of 4.35 per cent with no term limit, meaning the borrower will never need to remortgage, or risk falling onto a standard variable rate.
The unique deal is a type of retirement interest-only mortgage, a relatively new type of home loan that lets a borrower take out a mortgage and then only pay back the interest each month.
We could have a spirited debate about the pros and cons of this innovation, but it actually sparked another thought.
These retirement interest-only mortgages have been a bit of a flop. They were introduced as a way to help stop the many people who took out interest-only mortgages in the housing boom from having to leave their homes because they’ve not actually been saving the capital required to pay off their mortgage.
Apparently only a few hundred people have signed up to them so far, even though there are tens of thousands of people who would appear to be in need.
Perhaps even 25 years isn’t long enough for some people to have a lightbulb moment – or maybe they all have a cunning plan?
Not all oligarchs
What I found myself musing on though is whether financial services firms will similarly start innovating for people at the other end of the spectrum – modestly financially independent and asset-rich early retirees?
I’ve already explained how hard it was for me to get a mortgage, despite my technically not needing one. I was an ultra-low risk for banks, but they wouldn’t look at me because I didn’t fit their profiles.
Similarly, blogger ermine has explained that as an income-poor early retiree he might as well not exist in the eyes of many financial services companies.
The financial independence community sometimes ponders what would happen if it became mass-movement. Would the capitalism that makes it possible fall over?
I wouldn’t hold your breath for an empirical answer to that question. But on the level of day-dreaming it’s fun to wonder how financial services might be reshaped by a widespread shift to extreme-saving and ultra-compounding.
If you were granted one wish from the financial services industry for something for the likes of us, what is the first product or service you’d ask for?
My biggest FI demon – status anxiety – Monevator
From the archive-ator: Why a little passive income from a side project is worth a lot more than you think – Monevator
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Personal and residential care insurance that could be bought upon retirement. Maybe one day the Government will introduce a cost cap that might incentivise insurers.
Or an affordable and reliable offer on critical illness insurance for people who rely on their ability to earn an income to keep a roof over their head.
With the advent of big data, that seems to be accumulated about us all, you would think that (for banks) assessing the risk of an individual would be an easier task than the simple profiles gathered by the forms for a mortgage. A brief glimpse into your social media profiles, your browser history or your circle of friends could yield a better risk profile than you could ever glean from a form where a mis-truth could be written. Credit check companies seem to look at history. “Past performance is no indicator of future returns” yet the industry seems to regard you in a better light if you are constantly in debt and pay it with monotonous regularity.
I think the banks need to wake up to the opportunity. The only question being, “do you mind if our A.I. looks into your online activities?” I’m sure @TI, that a mortgage would have been forthcoming with a little more intelligence if the banks could only be bothered.
It worries me that being nearly a decade without any debt will have crippled my credit rating. A better approach to this would be welcome BUT it needs to be optional.
Just as passive investors ‘leech’ off the work of active investors, I think that we ‘leech’ off the wider investment sector/ society.
Our free banking is predicated on someone else’s overdraft, our cheap share trading is predicated on someone else keeping a large wodge of cash in their accounts, our ISAs are predicated on most people not making use of their full allowances (probably?).
As such, if a product did appear that was aimed at ‘us’, id assume they were making money from it, so its probably a bad deal for me. Obviously there are limits to that, but i think in general we are never going to be well served.
That said mifid now means I can no longer buy 1 fund that I currently hold, and it wasn’t particularly racy, so the option to buy that again would be nice.
That is sort of what I do for a living but not in the FS sector, in the CPG sector.
I have though done multiple sales pitches and lectures in the FS sector (bother here and some of the large investor relationship bans in the US) and they aren’t really into anything but known data.
However, tieing together known profile date and unknown cookie (browsing) behaviour will rise to incorrect profiling of a customer. (and that now starts to fall foul of various in country laws – Germany being the worse)
I do buy browsing behaviour (well not actual line item behaviour but more you are a member of various tribes) and if I have the given data against that browser (or router) I can sort of attribute it. We go a bit further and look at shared devices (ie the youngest daughter has it just after tea and then the father takes over etc) we also look at browsing behaviour across devices. (again in some countries – ie Germany this is fraught with legal implications on implicitly tieing data to a consumer).
What we can do is this.
You sign up to a website, a industry wide cookie gets landed along with your customer number inside the cookie.
We can then harvest the data you have given us against your known customer profile.
Against the cookie we can then buy browsing behaviour via tribes (from numerous sources including Nielsen), we can buy real time geo coordinates from apps, as well as household income (you known those free credit check scores you do, well we can buy that and allocate it to the industry wide cookie). We can also track you in our websites moving from one device to another and tie in your multiple cookie identities.
We can then tie together your known and bought in cookie data (as well as the interactions you did on our websites – stopped a video, stayed for 10 seconds on a page, muted the sound, scrolled down, came from a referral website).
In the end you become part of multiple segments which we can then buy adverts against or personalise your content.
In addition as most web sites are moving to social logins (login via facebook/google etc), we do harvest social media data from all over the place, but that is purely for market research and we tend not to link it to customer profile data. The additional data we can buy from social is quite good (geo coordinates, influencer rating etc) but we tend to use this , again, for market research
The base tech and analytical capabilities are quite easy to install, you will get change from £10m for a very very large customer base. The problem then is one of how quick and do you have the Data Science capability to build it. The last one is probably the killer as Google and Facebook are hoovering up talent at prices I cannot afford. (Google engineering team leads are upwards of six figures! In old school, that’s a programming team leader covering 6 programmers for £1.25m!!!)
An aside there – I work probably in the biggest global platform doing this outside of the sneaky beakies – so there it is from the horses mouth not sensationalist media coverage.
Wow @Simon. Plenty of part pictures as to how far we are being analised from my previous reading but that digs the rabbit hole a little deeper. Thanks for all that. World class.
At the start of the year I tried to buy a gold ETC for the Junior ISAs my two children have, only for the system to reject the order since it was a “complex product”!
ISAs and SIPPs have become so restricted over the last decade in terms of what you can/cannot invest in. The need for factors such as “reporting status” on S&S ISA investments is unnecessary. The panoply of regulatory crap from UCITS through to MIFID2 just adds costs for zero upside.
So I’d like to see a “No tears” clause added to retail products like SIPPs and ISAs. I’d happily lose my all my regulatory protections to gain total product flexibility and lower cost.
Looks like Monevator readers have little interest in retirement interest only mortgages .. other than me?
I’ve been trying to weigh up the best way to clear my interest only mortgage – I’m in the fortunate position of having some choices. Money in my limited company, taking a lump sum from my SIPP, or paying it down gradually .. all with their different tax implications.
An interest only mortgage for life might be worth looking at – if I can reasonably expect a tax free return in my SIPP of more than the mortgage rate . After all that’s why I switched to an interest only mortgage in the first place.
Someone’s going to say ‘peace of mind’ .. but apart from that might it not make sense?
Just reading https://www.theguardian.com/money/2019/sep/14/uk-pension-annuities-under-threat-as-rates-plummet – a little light reading on a Saturday night 😉
Commenter Stra3enkater says:
“Do some background research, eg Monevator for a starting point.”
I hope you and the elves are well. I have been very well behaved this year, spending sensibly and investing passively.
This Christmas I would very much like an interest-only mortgage (or other form of large interest-only loan) that has a guaranteed interest rate (tracker is fine) guaranteed on my SIPP, not income, and payable over maybe five years after the government decide that I am grown up enough to access my money. I’m fine taking @ZXSpectrum48k’s No Tears clause if it turns out I’ve done the sums wrong. My teacher says I am good at maths.
This would negate many concerns about governments messing with pension ages and mean I could FIRE now instead of spending more time at very boring work.
Thanks very much.
Good challenge, TI. At Nutmeg we try to be the genie making smart investors’ wishes come true, so it is very useful to see threads like this… If anybody wants a chance to provide input even more directly we run regular focus groups in London – email grant @ nutmeg dot com to get a place.
I’m with @Haphazard on this one. A decent way to hedge the risks of long-term care needs. Although I suspect the cost would make me wince.
Both of my parents-in-law ended their lives with complex needs. For the survivor it worked well because they had the money to spend. For the one who first needed care it was a nightmare because the other spouse had to weight up the immediate needs of a loved one with their possible future needs. The guilt in not simply turning over everything they had to ensure the best possible care for someone they had built a life with was horrible to watch.
In general, I am not too bothered about leaving a large legacy to offspring, but I have a son who is Asperger’s. He lives independently, but is not employed and has only very modest state support. We meet the bulk of his needs. I think it likely that we will need to support him after our deaths, and so the question of legacy looms larger for me than otherwise. Being able to control how much of our wealth goes in care costs would help us plan.
As an alternative to bonds/bond funds I’d like to be able to hold fixed term cash deposits within a low cost SIPP (preferably via the SIPP provider I have now) that pay rates comparable with a Cash ISA e.g. 1.5% for a 1 year term, vs 0.5% for 10 year gilt.
@old_eyes “Being able to control how much of our wealth goes in care costs would help us plan.”
Doesn’t your previous point somewhat challenge this assumption? If the government caps care costs it would only be on the basis of a level of care they decide on, you’re not going to pay “£60k” and then the government will pick up the cost of the care equivalent of The Dorchester for the rest of their life.
> yet the industry seems to regard you in a better light if you are constantly in debt and pay it with monotonous regularity.
It really does. I’ve never used debt before but recently bought a used car half on finance, mostly to see what the effect would be on my credit. Spoiler: it went up, and presumably will go back down when I pay the thing off. 20 years paying rent every month does nothing, but get yerself some genuine debt and your “score” goes up. It has nothing to do with creditworthiness (ability to repay) and everything to do with being in debt indefinitely.
Thanks for the link, TI.
@John – Yep! I don’t know how it would work, but that is a dream product for me!
I was fascinated with the WeWork IPO link.
It seems a confluence of errors has made it toxic to IPO – I wonder if they pull the IPO? After reading the link I went hunting about the CEO to find he had no real experience running a company – he seems full of energy like Elon Musk, but at least Elon Musk made a couple of successful prior to Tesla – same sort of character though – infectious enthusiasm.
I was amazed in a court case about the CEO plying an interviewee with shots prior to hiring, to find they has a policy of unlimited drinking now revised to 4 drinks a day. OMG!
The media over the latter part of the week has been very negative, so I suspect it would be best to pull the IPO and teach the CEO good corporate governance. Funny how an IPO becomes about a name – albeit because the numbers don’t stack up!
I would like better access to fixed fee financial planning, where I can pay for a review based on a reasonable hourly rate with no expectation that I will hand over my investments to be managed. Something more like the local solicitor.
@old eyes, I expect you may have considered this, but have you taken advice about how you can ring fence assets for your son (using a trust)? Once you have made provision for him then you have more idea how much you have left for your own care. I know this is looking at it from the other way round – identify what is needed for your son and then the remainder goes on care if needed, rather than what you want which is to identify the care costs and then leave the remainder. But it would presumably have the merit of protecting the funds your son needs.
@all I agree the whole credit score industry is a big issue/problem. I paid off my mortgage several years ago and don’t use credit other than occasional use of a credit card, paid off in full each month. I have no idea what my credit score is but it seems everyone is obsessed with them these days? What exactly would it be used for?
I haven’t had a loan or mortgage for a few decades. I fully pay off my (one) credit card every month. My credit score is 999. It simply ain’t true that you need loans to get a good score. OTOH, my “salary” is non-existent, and I agree that is a problem when completing forms (eg for a new bank account). Companies’ internal vetting processes are often to blame, not the credit score industry.
Correct, it’s the line of credit that’s key. It used to be known as credit history, if you have a history the lenders know what they’re getting, they can judge whether you’re likely to pay money back. If you don’t have a line of credit, don’t have a history of paying money back what is the lender supposed to base their decision on?
For better or worse a credit card is required and a credit score maintenance tool.
Thanks. Yes, we are looking at a trust as we update our wills. It is made slightly more complicated by the fact that there are special rules for money left in trust for a disabled or otherwise vulnerable person, but nobody seems to be clear on whether Asperger’s and other autistic spectrum conditions counts, or how you would get a clear ruling.
I am sure we will eventually find an answer.
On your other point on fixed fee financial planning, I have used IFA’s four times and each time agreed a fixed fee. So far, I have always found someone willing to do it as I make it clear that they are not going to get their hands on my portfolio to manage, and the choice is between a fee for advice or nothing. I have always provided a briefing document stating assets, liabilities, lifestyle and what it is I need to know, so the meetings have always been short and sweet, and I hope mutually satisfactory. I use them to check my thinking and my workings. Once when I first started with ISA’s (AM – Ante-Monevator) and I wanted to be clear on the rules and ask some questions about how trackers worked. Once setting up a pension when I started a business, and twice with specific pension issues to do with early retirement, lifetime allowance, changing tax rules and so on.
I did have one IFA, who took over the business from someone I had successfully used before, that went into full sales mode offering free advice now in exchange for a 2% annual fee to cover all management costs. As he pointed out, I would never be able to get the fees lower than that doing it myself as he could negotiate the best rates and knew all the best deals. This was after explaining that my preference and current portfolio was almost entirely passive.
I couldn’t help myself, I laughed out loud. He deserved no better.
Some very interesting thoughts in this thread, thanks everyone!
I was pondering the same question over the weekend, and wondering if there ought to be a regulatory duty (perhaps triggered by some level of existing savings or investment, so it’s not overly burdensome) for a bank or other financial company to truly consider your situation based on your actual details, rather than a proximity to some standard customer template or another.
So in the same way there’s been more regulation about mortgage affordability to ‘protect’ weaker customers from themselves, maybe there should be some sort of fiduciary duty to prevent the likes of us from being squeezed out of the cracks in the market?
@PendleWitch — Yes, we continue to pop up all over the place, despite the difficulties of competing with the social platforms (and what my millenial ex-gf described as our ‘1990s website’ design…) My favourite was probably when an insider at one of the tech giants told me how often we popped up on their internal investing discussion forum. Given the brains at work there, I considered this a pretty stellar endorsement! 😉
Us millenials are getting older you know, starting to knock on the door of 40.
I took great pleasure pointing out to my (millennial) (possibly now ex) friend that he was born closer to the end of WW2 than to today.
And I’m grumpy cos I remember when we were called generation Y, and I’m also grumpy because websites aren’t like they were in the 90s, and my phone battery doesn’t last a week anymore, and I don’t like facebook, and I prefer real ale to ‘craft’ beer, is that ‘millennial’ enough for you? Now get off my lawn. 🙂
This may be a barmy idea, my brain is feeling fuzzy (first day back in the office after a week of holiday tends to do that…)
…but is there currently any financial product that would act like an annuity to get me from a pre-retirement age (FIRE date) to my retirement age (when I can start drawing down a pension) that I could buy with a portion of my savings, and thus allow me to avoid ‘sequence of returns’ risk on my stash?
Hope that makes sense to someone.
I could afford to retire earlier (including perhaps a small percentage fee) if I could insure away the risk that my point of retirement is right at the start of an impending bear market or crash. That would be useful!
Glad to take advice is something already exists or I’ve got my thinking twisted.
It is possible to buy a fixed term annuity. But perhaps the easiest and most cost effective approach would be to make your own, by buying a ‘ladder’ of gilts. These would have maturity dates for each year you wanted to cover, and at point of purchase you would know the redemption value. I think it comes as close to a risk free option as there is.
@ Vanguardfan – thanks, I’ve often seen ‘gilt ladders’ mentioned and failed to understand their purpose – it all sounded rather complicated – but now I get the concept that’s something i’ll seriously consider. Much appreciated.
Perhaps in the era of very low interest rates the simplest way to get from now to drawing a pension, is to set aside the amount of pension you will receive per month multiplied by no of months until the pension is due, in a secure savings account, something like NS&I Income Bond’s .
When you retire early and you need to consider the sequence of returns risk, I would suggest a substantial cash buffer is more appropriate than insurance.
There is a potential danger with I will FIRE with a drawdown rate of 4% a month and events occur ….
I would suggest that the approach of I can live comfortably with a drawdown rate of 2% and live very well on 4% is much more likely to succeed, the drawback is needing more money saved/invested…..
@HariSeldon – thanks for your thoughts. I guess the problem is that if I wait until I have can FIRE with a 2% withdrawal rate, then that will push my working life out pretty close to a more conventional retirement age. With the majority of funds in equities (or at least a 60/40 equity/bonds mix), I’m then most likely to find out I’ve worked too long and end up swimming in money! It’s just those first 5/10 years of sequence of return risk getting in my way of declaring FIRE pretty early – that’s what I’m trying to mitigate.
Philosophically I’m equally averse to working ‘too long’ as I am to ‘running out of money’. This may make me sound like a thrill seeker; but it’s actually the opposite – I’m conscious that I’m naturally risk averse and and trying to find ways to give myself permission to ‘declare victory’ earlier and get on with the RE bit of FIRE, and not just keep on striving for a safer and safer position. One more year…
Ultimately, I suspect the solution for me will be a combination of:
– Securing a minimum income that would keep me afloat this pensions kick in,
– Maintaining a gentle foothold in employment (or side hustles), throughout the early years post FIRE, and
– Ensuring I’m in a good position to flex expenses if markets go south at just the wrong time.
The Gilt Ladder concept could be useful for part one of that strategy.
I think Jimjim’s original idea was that the bank would *ask* to access his data, for a specific purpose. Surely that is a bit different from taking people’s data without their explicit consent, for use for purposes they might not be aware of or agree with.
And it’s this that seems to have got out of hand – no doubt prompting the German legislation. We do now get asked about cookies etc. at times when clicking on things (usual message “we care about your privacy” = “we are going to invade your privacy for profit/political gain”). It’s just not realistic, in terms of swift and extensive way we use the internet, to think that there is a real awareness of what we are consenting to – I think most people would be surprised at the personal, micro nature of the data collected on them and the way it is being used.
It’s not just an invasion if privacy. It’s now a threat to elections, as the investigations of the UK Parliament’s Digital, Culture, Media and Sport Committee revealed.
So – AI and big data may be helpful in developing financial products. But perhaps this kind of data harvesting needs to be regulated and require explicit informed consent.
Not sure about the thinly veiled ad from the bloke from Nutmeg for their ‘come over to us and give us information for free’ groups.
What would you like them to do? It seems churlish to reject a company that is asking for your opinions, how are they supposed to know what you want?
Plus I’d expect some form of compensation, that’s the way it normally works.