Whenever I write about generational inequality, I get cross letters from baby boomers telling me that they’ve worked hard and saved hard for their money. They may have ended up well off, they say, but anyone who puts in the same kind of hard graft as they have and saves along the way will end up just as well off.
There’s truth in this. It is obvious that the old should have significantly more wealth than the young: with 30 to 40 years of earning behind them, the majority of them will have dealt with their mortgages, paid reasonable sums into Isas and pensions, and inherited at least something from their own parents.
However, this isn’t the whole truth. Look at just how much better off the old are than the young today: those aged 55 to 65 make up 18% of the population but control just under 30% of the wealth, according to the Resolution Foundation. Those aged 65-75 make up 14% of the population and control 19%. According to the Institute for Fiscal Studies, two in five retirees have a better standard of living than they did when they were working, and an extraordinary 80% of the over-65s own their own homes (over 70% own them outright).
Add it all up, and the over-65s control more wealth between them than the under-45s — for the first time ever. Some of this wealth comes from hard work. But much comes from the previous generous pension system, and a larger part than most over-65s are prepared to admit to is due to the simple function of being lucky enough to be a saver in a time of very loose monetary policy.
Thirty years of falling interest rates gave 30 years of stockmarket gains and, of course, 30 years of fabulous house price rises. And the miserable truth is that however hard today’s young work, they can’t dare to dream of replicating that experience.
House prices are so high they can’t get on the ladder (in 1994, 60% of households headed by 30-year-olds owned their own homes; today it is 34%). Asset prices are so high that the projected returns over the next decade are negligible. And, given the bottomless pit of cash demanded by their elders’ defined-benefit pension schemes, the wages of the under-45s working for many of the UK’s companies are showing pretty feeble growth rates too.
You could change all this in a flash by normalising interest rates. A rise to, say, 4% (a mere eightfold increase) would eliminate most pension deficits (they fall as rates rise) and deflate house prices. However, it would also have some nasty side effects (the total collapse of the buy-to-let sector, a wave of foreclosures, and possibly bank failures). That wouldn’t fit very well with the government’s plans — which is why it is constantly looking for ways to help with the transfer of wealth between generations in slightly more complicated ways.
So far this has included the introduction of the family home allowance for inheritance tax purposes (which effectively brings the nil-rate band up to £1m); the regulations allowing parents to pass pension assets tax free to their children on death; the introduction of the Junior Isa; and the new Lifetime Isa with its 25% bonus — bunging free money to under-40s saving for a house or for retirement.
But it also means letting the financial services industry have free rein to react to the need for wealth transfer products.
This brings us to Barclays’ revamp of one of its mortgage products — the Family Springboard. According to almost every headline in almost every paper earlier this week it is a 100% mortgage. It isn’t. It is an intergenerational offset mortgage, a product designed to help parents do what interest rate policy isn’t doing (get their kids a house).
It works like this. The kids apply for a mortgage with Barclays of up to £500,000 (fixed for three years at a rate of 2.99%). The parents open a “Helpful Start Account” (I am very against all these patronising names by the way) into which they deposit 10% of the total purchase price of the house. They then get interest on this at base rate plus 1.5% for the three year period.
The catch? If the buyer doesn’t pay his mortgage, mum stops getting her interest. If he continues not paying his mortgage she could well lose her capital too (if the house is repossessed and sold at a loss, she takes the hit). On the face of it, there is not much wrong with this. It works for Barclays: they get to lend more money than otherwise and their security is lovely liquid cash rather than hard-to-sell houses. It works for the kids as long as they really understand the risks of having no equity in their house at all: they get a mortgage at a relatively reasonable rate. And it works for the parents as long as they understand the risks to their capital: they get 2% on their savings and they don’t necessarily lose control of said savings.
You could argue that this just formalises the informal lending that takes place across the UK already (which given the mess so many of us make with the tax status of this sort of loan is no bad thing). Note that according to a report from the Centre for Economics and Business Research last week, the Bank of Mum and Dad accounts for about £5bn of effective house-related lending every year, making families themselves the equivalent of the tenth largest lender in the country.
But just because I can’t find anything particularly egregious in the deal itself (readers, let me know if I am missing anything) doesn’t mean it isn’t crazy. The very fact that the government and the financial services industry have to spend all this time coming up with fiddly ways to help the old transfer wealth to the young tells you that something is very wrong with asset prices. The over-65s should be richer than the rest of us — but not this much richer.
And in that sense the very existence of the Springboard Mortgage — not to mention the Halifax increasing the upper age limit for mortgage borrowers to 80, enabling a 55-year-old to borrow on a 25-year term — should be a warning to those who can bring themselves to wait a while to buy a property to do just that. Better, surely, to “wait to buy” as a family than to share negative equity as a family.
• This article was first published in the Financial Times