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Pay As You Bend Over (PAYBO)

Submitted by: MikeC (Admin) on 03-Dec-09 04:11:13 PM

Corporately-owned newborn baby
Credit: Sami' – Image is modified

Since the Tories have recently re-launched a policy they originally unveiled back in January (see: Tories Outline New Energy Plan), I thought it was time to put down some thoughts.

Both Labour and the Tories are proposing essentially identical policies to “green-up” UK homes which will saddle homeowners with up to £6,500 in “Pay As You Save” (PAYS) loans to finance the retro-fitting of energy efficiency measures.

The debt will be tied to the property, rather than the homeowner, and will be repaid over 25 years, offset by the savings generated, in theory.

Grant, the Shapp-tongued salesman

(Sorry Grant, couldn’t resist)

In a slick sales pitch last week, Grant Shapps said his party would “green up every existing home in Britain,” and boasted “interest” from Marks & Spencer and Tesco in providing the loans – I bet they’re interested!

He asked us to “imagine” – as if speaking of some Utopian future world - walking into a store and: “…at the checkout, as you hand over your Clubcard; the cashier offers you the prospect of permanently lower utility bills.”

“There's nothing to pay, now or even later,” he pronounced.


Seriously, why do they insult us like this? They really do think we’re all thick don’t they! (Don’t worry, I’m stopping there; read on…)

He goes on to hail the creation of “70,000 new jobs and a £2.5bn marketplace.” In amongst that lot breeds many middle-men diluting your £6,500, you can count on it.

What’s missing in all this of course is the detail on financing. How about interest rates and the total repayable, for example?

25 year repayment plan – how much?

M&S currently charge 8.7% APR on personal loans. M&S don’t offer personal loans over a 25 year period, nor do they offer mortgages. So I’ve extrapolated the total cost of an energy refit based on its personal loan rates:

  • Loan Balance:  £6,500.00
  • Loan Interest Rate: 8.70%
  • Loan Term: 25 years
  • Monthly Loan Payment: £53.22
  • Number of Payments: 300
  • Cumulative Payments: £15,964.62
  • Total Interest Paid: £9,464.62

Expensive, no? Very expensive.

Statisticians reckon average standard domestic fuel bills are around £1,239/year. The annual repayments (above) total £638.64.

So using this finance model the energy-saving measures must slash bills by at least more than half – at least - to truly justify the “Pay As You Save” label.

I can’t believe people in fuel poverty pay anything near the average fuel bill, let alone that a £6,500 energy-refit will cut bills by half in the average home. It’s great to say 25 million homes will be entitled; but it already seems to favour the high-energy consuming middle-classes.

You’re pricing too high Mike

OK, so personal loans are considered riskier than debts secured against homes; maybe we should compare it to a mortgage with a lower interest rate then. Well, whether personal or mortgage, we still have to ask, what is the interest rate payable, and is it fixed or variable?

Mortgage providers don’t currently offer fixed-interest rate deals spanning 25 years - it’d be a brave one that did if they want to see a real-rate-of-return, over and above future inflation, plus administration and marketing, over the lifetime of the loan.

What’s more, mortgage providers themselves borrow money to loan to us. So whilst the cost of borrowing is low today, the Bank of England will increase rates once we’re out of the long grass.

So the interest rate has to be variable then, surely? If the Govt insists on free-market principles, that is; ie., no subsidies.

Assuming this is so, the voter-friendly hook of “Pay As You Save”, already appears to lack credibility: not only can we not calculate future interest and inflation rates, but nor can we calculate future energy prices against which to offset these loan repayments either – although we can safely assume they will be higher, I agree (especially with all this on top!).

Mortgage comparison

Let’s look at a fixed-rate mortgage comparison then. Currently they range from 3.65% (1 year) and 7.10% (2 years). So I’ll plump for 4.5% and pretend it's fixed.

  • Monthly Loan Payment: £36.52 (4.5%)
  • Total repayable: £10,956
  • Total interest paid: £4,456

But I can’t see rates being this low in all honesty, despite the low risk. Under Tory proposals, according to The Times (Conservatives propose energy-efficiency loans), “the market would price in the default rate, less than 2 per cent on utility bills, to the loan costs.”

Assuming I’m reading that correctly then, it leaves just over 2.5% using the above mortgage-type example, minus costs and everything discussed above – improbable (unless they cross-sell to this fresh new database of course!).

[Added: Oh, I forgot to mention... again, according to The Times, the loans will be packaged and sold on the markets too. Do CDOs (Collateralised Debt Obligations), Northern Rock and Lehman Brothers et al ring a bell?]

One more thing

What about the summer months, when energy bills are lower than monthly/quarterly repayments?

There is more to this but if one thing is at work here, in this and other measures rolling out (smart meters, CERT, CESP etc.), it is that we are not so much paying the utilities for their energy anymore, but not to use it.

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