“It’s better to travel hopefully than to arrive”

Epilogue

What has been achieved at the end of this sometimes-complex journey?  My objective was to pass on some of the key general principles relating to loans and mortgages, and of use generally for other financial analysis. 

I hoped to convey sufficiently general-purpose concepts so that readers will be equipped to perform their own analysis on the many products available throughout the financial services industry, whether loans or not.  Compound interest and the IRR apply just as much to an investment as it does to a loan.

I have also exposed some of the pitfalls in the lending industry – flat rate loans, Rule of 78, annual compounding but monthly collections, and interest-only loans with the wrong sort of investment plan.  We identified the irony that the safest investment is unsuitable to repay an interest-only loan.

We looked at the flexible mortgage and, in particular, the current account mortgage.  This method of lending is very likely to become commonplace in the near future.  There is no reason why a single, cheap flexible mortgage cannot replace all other sorts of lending, such as credit cards loans, car loans, hire purchase, unsecured loans and second mortgages.  At the same time, it can be a home for all your short-term investments too, but at rates significantly higher than any other deposit-taker would pay.

I have suggested that while personal attitudes to risk and financial skill-level will affect ones ultimate choice of a loan scheme,  the use of an accurate comparison tool is vital in order to put subjective judgement into context and to enable scheme-evaluation to be consistent.  The IRR and the NPV provide this tool.

We also examined ways of profiting from gearing, in particular, how to become a millionaire from building up a portfolio of investment property.  I also hope that the downside risks were made prominent enough, as nothing in this life is ever certain.

If you make it to retirement, you may want to turn your house back into income, and the methods for doing this were discussed.  A challenge was laid down to a lender wishing to take up the Reverse Mortgage concept, which provides the best of all worlds for both lender and borrower.

I sincerely hope you will find the spreadsheets of use.  They have been quite carefully designed so that they are as general purpose as possible.  As in any software, there might well be a bug or two, so please e-mail me if you discover one.

The Internet and the digital revolution
E-commerce is now beckoning the consumer with promises of transparency and choice.  It is now possible for anyone to enter some basic personal details on to a web page, and then an electronic robot will trawl through hundreds of schemes in just seconds, returning with an ordered best-buy list.  This process in theory heralds a perfect marketplace, with supplier’s products competing where they should, in personal appeal rather than mass appeal.

Such mass customisation is effortless with a computer.  The future of the direct sales force, representing just one company, is under threat: prospects can now “go-direct” so much more easily, and compare competitor’s products on the web or use an on-line site that does the comparing for you. 

The Digital broker
Independent Financial Intermediaries (IFAs) who embrace the Internet are on a winning ticket.  There is still a need for someone to sift through a large, ever changing list of available suppliers and schemes and then attempt to match them to an array of different consumer-types.  This process is itself able to be digitised and some of the variables were discussed in this book.

But, at the time of writing, I have yet to see a truly accurate web site, which is able to identify the individual type of consumer, source every possible lender, and then list the results in a genuine value-for-money order, using the IRR as the measure over a realistic life span.  There is no doubt that this will happen soon.

Transparency and commoditisation
Lenders and suppliers generally are right to be concerned about this process.  Borrowers are now demanding more transparency:  hidden costs must be exposed and products must be made simpler so that lenders can no longer camouflage bad-value with obscure small print.  The larger banking lenders have probably more to fear than the specialist lender and the mutual societies.  Specialist lenders can command their smaller but specific niche areas, and can retain their competitive position because of their smaller mass.  The Halifax or Abbey National are forced to serve the standard, commodity market in large volumes to survive, since the proportionate effect of niche products is so small in comparison to their size.  For their commodity products to remain attractive, even a small interest rate reduction can make a massive difference to shareholder’s profits.

Integration, digital efficiency and flexibility
The web is a perfect sales channel for almost any cerebral product requiring no physical stock, and financial services fit very well.  But the front end processes must be integrated with the back end administration for complete success:  the sales process must be seamlessly connected to the underwriting and case processing area and thereafter to the collection and administration departments in order to achieve the overall speed and efficiency improvements everyone expects.  Such efficiency brings cost savings for the benefit of everyone.  Eventually, it might be possible for potential borrowers to auction themselves on the web, with lender’s bidding for their mortgage.  The lender’s interest rate margin will change depending on the attributes and quality of the case being offered to them.

Borrowers expect to be able to apply for a mortgage or a loan on-line.  Most people hate form filling and a mortgage application form is one of the worst.  Successful lenders will facilitate this process, and also give customers an opportunity to track the progress of their application on the web without having to hang on to the telephone listening to a recorded voice saying how important your call is and that you are twenty seventh in a queue.  

Once the mortgage has completed, digitisation still has a role to play. For example, a flexible mortgage can be ‘operated’ by the borrower through the lender’s web site.  An unlimited set of repayment schedules can be set, reset or cancelled at the click of a mouse.  Statements would be immediately available on-line.  Since the process can be entirely automated, no human need be directly involved and so the costs of ‘managing’ your own mortgage are down to just your own time, probably on one wet Sunday afternoon.

So, soon you will be able to apply, complete, service and redeem your mortgage entirely electronically. This will save costs and will enhance efficiency, speed, and flexibility for both supplier and consumer.  The supplier will profit from savings achieved: market forces will ensure that much of the saving will have to be passed on to the consumer.  

Technophobia
Some people fear this revolution.  They are concerned that they are not able to cope with computers – it all seems so fast and clever.   I suspect that there will be a market for these consumers, who want to be served in the traditional manner.  Traditional products will still be available but with more expensive, old-fashioned paper transactions, telephone and face-to-face ‘people’ transactions, the costs of such an ‘old-regime’ product will make them more expensive.

The future is bright…
Much of all this is happening right now.  There are still many aspects needing improvement.  The web is still slow – the World Wide Wait is still a worthy acronym.  But new, much faster connections are just on the horizon.  Moreover, mobile digital communication will soon connect to the web at much faster speeds than current WAP phones can achieve.

Future technology will change the world as we knew it far more comprehensively than we have ever experienced before.  The original industrial revolution took over a hundred years to take full effect:  we can now witness an industrial revolution almost every five years - and reducing!