A couple more remarks on my second numerical example. This is the one where the couple take out their maximum REL loan at aged 65 and continue to live in the house until aged 95 (Example 2). On the surface this results in a much worse loss than the 85 year old couple taking out a maximum (double the size) mortgage and living in the house until they are 95 (Example 1). However, the probability of a couple living in a house for 30 years is actually much less.
A doctor told an elderly relative of mine that if they made 85 their life expectancy was two years. But if they made it to 87 their life expectancy was another two years. And so on. The message here was that once you get to that 85 year threshold, it will probably take a significant health event (e.g. stroke or heart attack) to finish you off. But to get to 85 in the first place, you must have looked after yourself, oh and and chosen your parents well. There are plenty of folk aged between 65 and 85 that end up being not so lucky.
The second point in Example 2 is that after 30 years, what started out as a million dollar house ended up not being quite a million dollar house after all that time. Some may think that a laughable assumption, but I don't think so. The current property boom has been fuelled by lifetime low interest rates, families funnelling dual incomes into their mortgages, not just one, and houses getting more expensive because they are getting bigger. None of these trends are sustainable and extrapolatable going forwards. In the long term, you can't have house prices going higher and higher when wages are not increasing in line with house affordability. Politically a house price crash today of around 50% to correct this would not be acceptable. So the only way out is a more modest crash and wages gradually catching up with prices over a generation. I believe that my house price line as detailed in Example 2 is realistic. Consequently I think Heartland's main risk in REL mortgages is in those longer term loans. Fortunately for shareholders, I don't think there will be many running over 30 years!
SNOOPY