Hargreaves Lansdown’s Danny Cox suggests 6 things those with a repayment shortfall might do

2nd May 2013

Hargreaves Lansdown’s head of financial planning Danny Cox  has sent out a brief note about what to do if you face a short fall in your interest only mortgage repayment vehicles in the wake of today’s FCA paper.

He sets out six remedial options to consider as follows –

·         Switch to a repayment mortgage

·         Extend the mortgage/ remortgage

·         If over age 55 use tax-free cash sum from pension fund

·         Use ISA or other investments

·         Overpay from income or bonuses

·         Sell then downsize or rent

Cox adds: “The best way to ensure a mortgage is repaid at the end of the term is to opt for a repayment mortgage at outset. However switching to a repayment mortgage to cover a £50,000 shortfall by 2020 will be expensive and could increase monthly repayments by around £530 a month.

“If you saved £480 per month into a stocks and shares ISA this would grow to £50,000 over 7 years based on a 6% return after charges. Clearly this is a more risky approach than a switch to repayment.

“Using tax-free cash from your pension may look attractive however it may dent your retirement plans. If you extend your mortgage you also need to make sure you have sufficient life insurance and income protection.”

23 thoughts on “Hargreaves Lansdown’s Danny Cox suggests 6 things those with a repayment shortfall might do”

  1. Jim M. says:

    Hi Shaun,

    crack cocaine, powder cocaine, heroin, cannabis, ecstasy and amphetamines

    It’s looking like one heck of a weekend!

    What’s prostitution, and is it cheaper and more readily available than popcorn?

    1. Anonymous says:

      Hi Jim M

      It seems that life at the Office for National Statistics has a lot more to it than I ever expected! I wonder if they have already seen a flood of applications for jobs?

      Rather oddly this came up in the BBC 4 documentary/promo last night on the Troubadours (singer/songwriters of the 70s) where David Crosby suggested that marijuana and the psychedelics boosted them but coke and heroin destroyed them…Of course he is not exactly an impartial guide. If we move to music it was good to be reminded of Carole King’s Tapestry a bit of a forgotten gem…..

  2. realfinney says:

    Japans national debt has more zeroes than the Imperial Japanese Navy: it’s just over 1 Quadrillion Yen.

    Off topic #AskBoe looks set for some twitter fun.

    1. Anonymous says:

      Hi realfinney

      Yes the Bank of Japan cuts down the zeroes by counting its holdings in units of a thousand Yen. Even so its JGB holdings are 208,225,844,925 of those units as of May 20th.

      I did join in on #AskBoE about how many fake UK £ note’s there are in existence and got this reply.

      Bank of England ‏@bankofengland 22h

      .@notayesmansecon a tiny fraction of 1% and we would like it to stay that way. Check your notes to help http://ow.ly/xqIqP #AskBoE

  3. Pete Comley says:

    Great article, as ever. I’m guessing that Japanese have been catching up with some bedtime reading on Keynes who said:

    “A Government can pay its way by printing money…A Government can live this way when it can live by no other. This is form of taxing people which is the most difficult to evade and which even the weakest of Government can enforce when it can enforce nothing else.”
    Source: Keynes, J. M., 1922, “Inflation as a Method of Taxation”.


    1. Drf says:

      But Keynes also wrote about how inflation destroys societies and economies, so when quoting Keynes on inflation and its effects it is important to present a balanced view of what he actually wrote? The real problem is that Keynes was not consistent; what he wrote at any particular moment was according to his erratic desire to influence things at that particular moment. As we know only too well, that is a demonic symptom of present economists and politicians also?

      1. Pete Comley says:

        Keynes was not advocating governments took that approach. At that time he believed it was wrong for the reasons you state. However he was telling it how it was. That is what states do when they have no other choice.
        Over him changing his mind on this, I’m not sure history quite portrays him accurately there. After writing the General Theory in 1937 in letters to the Times it is very clear that he still saw the evils of inflation. During the depression he just did not think it a big issue relatively. Unfortunately his followers mistook his General Theory to be a general one.

        1. Drf says:

          “That is what states do when they have no other choice.” They always have another choice, but of course it is the politicians who take the decision to debauch the currency, as the easy way to fund their proligacy and balance their budget by stealing purchasing power from those who have already paid a high level of taxes on their incomes, and fiat money held.

          I did not suggest that Keynes changed his mind on inflation, since he well understood in fact the inevitably bad outcome of inflation; however he did like a chamelion change what he stated and wrote to suit the moment, and to support his predominantly Socialist leaning, as well as his other predilections!

          What Keynes actually advocated, was to debase a fiat currency temporarily when there was a recession, and then to redeem that debasement when the economy recovered; that last bit is the bit which politicians leave out and pretend is not necessary (particularly Socialist politicians). The problem is that they have to get re-elected and that is why what is called “Keynesianism” does not and cannot work pragmatically. All it becomes with modern Zimbawe economics and politics is successive debauchery, and they try to pretend it is Keynesianism; it is not, but is only half Keynesianism – the half which they like.

          The problem is that this continuous and successive idiocy then actually destroys the real-wealth creating processes in any economy, as we can see now for example with the demise of the UK.

          The poetic justice however in all of this is that the debauchery which the politicians like and implement comes back to hit them like a whiplash, because, particularly in a Socialist economy as the UK has now become, the costs of everything the government spends Public money on escalate just like all other costs. So debauchery solves their immediate politicial and fiscal problems, but at the limit these foolish politicians completely destroy the goose which lays the golden egg, and their economy is then in terminal collapse, as can be seen so many times in history. That is what we are now heading for.

  4. forbin says:

    Hello Shaun,

    When Ipads and pooters and other such landfill (!) are deflating ( by the time honoured method of you’re getting more for your money with “features” so ergo they are cheaper regardless of the ticket price) but your food costs are rising

    who cares ? well as ExpatinBG points out , not those at the top and in charge.

    They must be doing it right because we ‘re not rioting , the last riot was not to change the HMG but to loot sneakers and phones …..

    Truly TPTB have won .

    Also I suspect that cocaine and prostitution additions to GDP are a green light to legalise them, the coming crunch can be ” Somer’ed away” , seems George Orwell just got the date wrong.

    After all the War on Terror has not been cancelled yet ( has it? ) .


    PS: now who taxes food as a VAT ? dammit, popcorn will not keep too long !

    1. Anonymous says:

      Hi Forbin

      Food is not exempt from the consumption tax in Japan which used to be on the grounds that as it was such a low rate it should apply to pretty much everything. That case is weaker at 8% and will be weaker still if we see a rise to 10% next year.

      As to the legalisation issue I suspect that you may well be right.

    2. Anonymous says:

      The Yanks have got there – legalising marijuana so the poor will be “chilled out” and unmotivated to riot.

      I had the impression that coke was more popular with rich city brokers – they can afford it.

      best stick to popcorn

  5. Noo 2 Economics says:

    I believe the Abenomics fantasy was that if you stimulate inflation this will force employers to pay higher wages and so increase GDP – they just forgot about the difference between nominal and real growth and it hasn’t worked any way as you point out.

    1. Anonymous says:

      Hi Noo2

      This fantasy -higher inflation causes even higher wage growth- is very commonly held amongst the economics establishment. As to a causal mechanism they are much much quieter. In my opinion they are relying on pre credit crunch models and trends and assuming they still have to be true. What could go wrong?

      The other alternative is much darker which is that they know that it is no longer true but they press on anyway.

  6. Anonymous says:

    Great stuff, Shaun.

    I tried to link to the paper by M. Yehoue on inflation and welfare that you cited, as it sounds very interesting. Alas, it seems that I am still blocked from accessing any papers on the IMF website. I suspect that this is retaliation for the ever so factual comment I left on the current head of the IMF Statistics Department, Louis-Marc Ducharme. I suspect it is M. Ducharme himself, the vindictive little martinet, who is responsible.

    In any case I forgot to mention that in approving publication of tables of major contributors for 11 months that were not based on the ONS method, M. Ducharme was himself flouting international conventions established in an international manual published under the auspices of the IMF, “The Practical Guide to Producing Consumer Price Indices”. Its main editor, David Fenwick, was the chief ot the price statistics program for the ONS for many years.

    Although UNECE is directly responsible for correcting errors in the manual, IMF also assumes responsibility for errors. Over a year ago, I informed them that there was a typo on p.204 of that guide in the example showing how the ONS method worked in practice:


    The mistake, of course, is in the “+” following the expenditure share “203/1000”, which should be an “x”. The mistake was copied directly from an earlier edition of the ONS Consumer Price Indices Technical Manual. I informed the ONS of that error and it was rectified in their next edition. Nothing was done about this. If you do the calculation based on the typo, it comes out to housing having a contribution to the total inflation rate of 5.46%, not 1.34%, which can’t immediately be dismissed as preposterous, especially if one lives in Britain. (Just kidding!)

    Just what kind of organization is this IMF? It doesn’t mind hiring people at the highest level who will simply ignore the IMF’s very own guidelines, for no reason at all. It will retaliate in the most petty way imaginable against external criticism, and it is too busy doing this sort of thing to fix up even the most easily repaired typos in its online documents. (By way of comparison, all typos in the ILO Consumer Price Indices Manual are immediately fixed in the online version, as soon as they are confirmed.)
    Andrew Baldwin

    1. Noo 2 Economics says:

      Where do I look for your comment on the IMF web site Andrew, I’m curious as to what you said.

      1. Anonymous says:

        Thank you for your interest, Noo 2 Economics. The comment was made regarding Shaun’s excellent March 27 column, “Will applying IMF austerity to Ukraine have the same effect it had in Greece?” I trust you can access it yourself.

        By the way, here is a little more detail about the error in the CPI for traveller accommodation that should have ended M. Ducharme’s truly disgraceful career. It all started well. StatCan recognized that it was time to get away from the bush-league judgmental samples that are used almost everywhere in the Canadian CPI. The traveller accommodation survey was redesigned to have probability-proportional-to-size (pps) sampling in each regional stratum for smaller hotels and motels, based on total room revenue. Since it was sampling with replacement, larger hotels could be chosen once, twice or even thrice, so they would have sample weights of one, two or three. The monthly production cycle involved treating each monthly price relative as a link in a chain index, which was fine, but these one, two, three sample weights were price updated as if they were expenditure weights, which was wrong. The 2004 IMF Producer Price Index Manual clearly stated that this was inappropriate. It led the traveller accommodation CPI to grossly underestimate the rate of inflation. Since the same database and methodology was used to calculate the producer price index counterpart, the traveller accommodation services price index (TASPI), the same extreme downward bias affected this index. I was the economist who finally detected and analyzed the problem, small good that it did me. The TASPI was revised back all the way to 2001, when it was started, over the course of six or seven years. The error in the CPI was left unchanged, as it was judged not sufficiently important at the All-items level. I did not make the presentation to the Price Measurement Advisory Committee (the StatCan equivalent to the Consumer Price Index Advisory Committee) regarding the error, nor was my contribution in any way acknowledged in that presentation. It contained a glaring error regarding the sample pps weights being expenditure weights, not 1, 2, 3 weights, which was immediately remarked upon by Jack Triplett, one of the PMAC members. He was obviously puzzled as in pps sampling without replacement, the weights would all be one, and surely we would no more think of price updating those weights in the hotels index than we would the weights in any other unweighted sample. Of course the presenter, Tarek Harchaoui, had no satisfactory response. I revised his presentation to correct this and other errors, but could not obtain approval even to have it distributed as a room document at a PMAC meeting. The other main error in the presentation was the counterfactual insistence that this was a production problem, when in fact great pains were taken to code price updating of these sample weights in the mistaken belief that this was the conceptually correct thing to do. This particularly piece of disinformation is still part of the internal documentation of this error at StatCan, or at least it was in March 2012 when I left. Quite disgracefully, the traveller accommodation index, intended to be a showcase index of good practice, has not had its internal weights updated since the consumer price diversification initiative. It is still based on the same 1998 sample frame used then, and is now badly out of date. It seemed all and sundry just wanted to forget about it, whatever the costs in the accuracy of inflation measurement for hotels and motels in the CPI and in the producer price indexes.
        How can someone responsible for this kind of a debacle be a suitable head for the IMF Statistics Department? Thank you again for your interest Noo 2 Economics.
        Andrew Baldwin

        1. Noo 2 Economics says:

          Thanks for taking the time to reply Andrew, unfortunately it has gone over my head as it is beyond my understanding other than M Ducharme authorised a change in the formula for the calculation of traveller expenses as related to hotels etc which was a change for the worst.

          So, thinking about it, he seems an excellent choice – I was reading something from the IMF a few days ago where mention was made of the success in inflating Japanese wages yet I have seen nothing anywhere to substantiate that claim and the IMF provided no stats to justify it – perhaps Ducharme again?

          1. Anonymous says:

            Sorry Noo 2 Economics. I haven’t explained things very well. M. Ducharme authorised a new way of calculating the consumer price series for hotels and motels which could have been and should have been a big improvement. Instead it made the index worse, showing way too little inflation. This was done because the index was calculated based on monthly chain links and the take-some indexes, which were calculated as weighted geometric means, had their weights price updated. This is appropriate for weighted arithmetic means but not for weighted geometric means. If you want to pursue the subject, it is thoroughly presented, ironically enough, in the 2004 IMF PPI Manual. Section F of Chapter 15 on Fixed Base Versus Chain Indexes gives the dos and don’ts of chaining. Sections 15.89 and 15.90 clearly state that the weighted geometric mean formula passes the circularity test, so it would be completely inappropriate to price update the weights in question, as was done. The manual was published in 2004, but it was put together from 1998 forward so it was almost certainly circulating in manuscript when M. Ducharme was responsible for the change in methodology for this index. I noticed it in the PPI Manual after I had already analyzed the error, and drew it to the attention of my supervisor. If anyone else at StatCan had noticed it before me, I was never made aware of it, which is pretty scary, since it was supposed to be our bible for compiling producer price indexes.

            I have no idea what M. Ducharme is up to at the IMF right now. As you know, I am banned from accessing their website and depend on kind souls like Shaun to pass on their papers to me.
            Thanks again for your interest and sorry I didn’t explain things better. It’s technical stuff, but as Premier Couillard would say, it’s not brain surgery. (The recently elected premier of Quebec is a neurosurgeon.) Andrew

  7. Anonymous says:

    Shaun: These are the Japanese house price indexes for February.


    Although the overall index is almost flat, notice that the condominiums price index is up by 9.7% Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      Thanks for the house price numbers, the condominiums price rise is intriguing isn’t it? Interestingly the imputed rent series is very different in Japan to the UK. Not only was it a subtraction from GDP but it also reduced consumer inflation as it would have been 4.1% without it in April.

      I am sorry that the IMF blocked you for being considered a heretic, for obvious reasons I hope that such things do not spread. Anyway here it is.


      1. Anonymous says:

        Thank you very much for sending me Mr. Yehoue’s paper, Shaun. You are the best.

        It seemed to me that M. Yehoue pulled his punches in this paper. He was content to be the anti-Blanchard, showing there was not much of a case for having inflation targets above 2% in developed countries. He didn’t make a case for reducing the target rate below 2%, except perhaps, by erroneously indicating that the Reserve Bank of New Zealand has a mid-point target of 1.5%. In fact, a 1.5%
        target rate had been proposed by Bank of Canada Governor John Crow at the time of the initial renewal of the inflation-control agreement in 1993. His proposal
        was rejected out of hand by the Finance Minister, Paul Martin, and Governor Crow therefore refused to stand for a second term. Consequently, the renewal agreement, announced on December 22, was accompanied by an announcement that Gordon Thiessen would be replacing Mr. Crow as governor on Febuary 1, 1994. By the way, John Crow, although a Canadian citizen, was born in London, like yourself.

        By the same logic that a 4% inflation rate imposes greater opportunity costs on holding cash balances than a 2% inflation rate, surely a 2% inflation rate imposes greater opportunity costs than a 1.5% rate. Just how low a central bank I am not sure. I don’t think one would want to go to 0% because with measurement bias that would effectively be imposing a deflationary regime. However, I certainly think that the target rate could be lowered to 1.5% or at
        least to 1.75%.

        The Reserve Bank of New Zealand has had a target range of 1% to 3% for inflation since its 2002 Policy Targets Agreement (PTA), but it is only with the 2012 PTA
        that it has added the qualifier “with a focus on keeping future average inflation near the 2 percent target midpoint”. Before that it had a target range of 0% to 3% but never specified any midpoint in its PTA.

        Pace M. Yehoue, the RBNZ only targeted the CPI excluding credit services for the short duration of its 1997 PTA. In 1999 Statistics New Zealand removed credit
        services from the New Zealand CPI, and a new 1999 PTA changed the inflation indicator back to the overall CPI. It is a little distressing that an IMF economist would be unfamiliar with this history as its importance stretches way
        beyond New Zealand itself. In its 1997 PTA the RBNZ became the world’s first central bank to target a consumer price series with a net acquisitions approach to owner-occupied housing (OOH), excluding interest expenditures. Similarly, Statistics New Zealand’s 1999 change in methodology made it the first statistical agency to calculate a consumer price series with such an OOH concept as an
        official and not an analytical series. When all the countries in the EEA start publishing OOH series in September, they will be following in the path forged by Statistics New Zealand. (Actually they will be following in a path forged by
        me as well, since the analytical NP2 series I calculated and published in 1985 in a StatCan release preceded the Statistics New Zealand series by more than a decade.)

        Thank you again for sending me this IMF paper.

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