GLOSSARY

This is not just a Glossary. It has new concepts to explain.

ILS Model / System - The Ingram Lending and Savings Model / System - a new model for housing finance (mortgages) and for lending and savings generally, with significant safety features.

AEG% p.a.  - Average Earnings / Incomes Growth Rate % p.a. - various definitions are used and discussed in the texts. One can be the aggregate of all incomes (GDP) per person or per working person. The definition selected can have an impact on what conclusions can be drawn. In these studies the simplest definition is used, being the nationally published data for average incomes, with readers asked to make their own adjustments for particular purposes.

A similar problem arises when a prices inflation index is used: different people buy different things at different stages in their lives. And with an average income index people earn more as they get more senior. When it comes to lending, the important thing is to ensure that the cost of the payments is affordable and that the rate of Payments Depreciation is enough to overcome any difficulties with the index chosen.

Payments Depreciation D% is defined as the rate of easement of the cost of payments for a person of average income / earnings. Mathematically it is given by: e% = AEG% - D% (all p.a.) where the current value of e% is the percentage increase in the level of payments due next year.

If AEG% = 0 % and the payments are fixed then D% = 0% and the 30% p.a. of income cost of mortgage payments remains at 30% every year. If AEG% = 4% p.a. then the value of D% = 4% at which rate the projected '% of income' cost reduces over 25 years to 11.25% or similar.

With ILS Mortgages D% is a managed figure. It is not left to AEG% p.a. to define it. By not lending too much this allows the lender to safeguard the value of D% as conditions vary and hence to keep the level of arrears minimal. This risk management function also ensues that the lender  will not lend too much when interest rates are low, nor too little when they are high.

Mortgage - a loan given for the purpose of buying a house.

Traditional Mortgage - Level Payments (LP) or Annuity Mortgage - traditionally mortgages are offered as a series of level payments which combines a capital repayment plus interest. The concept falls down when interest is raised on account of inflation. The LP Model does not allow the inflation component of the interest rate to function. The whole system is consequently made highly unstable.

Too much is lent at low interest rates, too little at high interest rates and the amount that can be lent varies so much that the value of collateral security is made highly unstable.

True interest is the marginal rate of interest above the index used for average incomes / earnings growth, AEG% p.a. There is no name for the marginal rate of interest above AEG or incomes growth so the writer invented True Interest as the term to describe it.

Given r% nominal interest true interest I% is given by:
I% = r% - AEG%

Taken from a Slideshow that Edward Delivered to Universities pre-crisis.

True cost is the cost to the borrower's income when repaying a mortgage. The 'cost to income' is a function of true interest and the income (wealth) borrowed, and how fast the loan is repaid.

For example a mortgage of true value of 3.5 times income, may cost in total, as much as 4.69 years' income to repay.  That is the 4.69 times income true cost based on average income as the units to measure. The true net cost would be 34% more income repaid than was borrowed. Just over a year's extra cost to income. There is nothing forced here - it is a way of recording and measuring what is going on.

The borrower's viewpoint is different from the investor's viewpoint. The borrower wonders if his/her income will outpace the index or fall behind because that will alter the cost-to-income of borrowing. The investor is only wanting an index-related return on the welath invested and so the average income figure suits him/her quite well.

On an annual basis 1% true interest, based on average incomes, transfers spendable income (wealth) at the rate of 1% p.a. of the applicable wealth. For example, if you have or have lent three years' income then a 3% true rate will transfer 9% of a years' income p.a. from the debtor to you, the lender. This is one reason why it is not a good idea to lend or to borrow too many years' income. Borrowers will not be able to afford a much higher transfer rate. Remember, this is a measurement which applies to overdrafts, as much as it applies to mortgages or government debt. 3% was the average rate of wealth transfer (spendable income transfer) for the UK 1970 to 2002.

Wealth is the amount of true value (spendable income) that someone has stored or saved. Wealth can be lost to a lender / saver if the borrower repays less income than was borrowed. For example, if the lender lent 4 years' income and got repaid 3 years' income then the borrower would have an extra year's income to spend after repaying the loan. We measure wealth in units of average (spendable) income.
Here is an example in which that loss happens.

All illustrations contain a column which converts the annual payments made to a % of current income (payable at year end). By adding up these percentages you find out how much wealth has been taken to repay the wealth borrowed.

Here the wealth lent was 4 years' income (out of a lifetime's income of say 40 years) and the borrower repays 3 years' income so enabling the borrower to spend 41 years' income and the lender spends 39 years' income.

But if you look at the money repaid, it comes to 77.4% more than the money borrowed.

If you look at the rate of interest it is 3% below the rate at which incomes are growing. It might be that the real rate of economic growth is 3% and prices are rising at 5% p.a. so the the real rate of interest is zero, so it is keeping pace with prices. That is enough to lose the lender a year's income.

---------------------------

ILS Defined Cost Mortgage - A mortgage with a fixed true rate of interest, a fixed rate of easement (Payments Depreciation) of the payments relative to an index of average incomes / earnings, and a defined total 'cost to wealth', or spendable average income. With a fixed interest Level Payments (LP) mortgage the rate of payments depreciation is the same as the rate at which incomes are growing. If incomes are falling the system fails. D% p.a. is negative and costs rise relative to incomes as it has been doing in some European nations. If D% is small or zero, (in Turkey they have a fixed zero D% mortgage model which is index linked to a wages index), the borrower gets payments fatigue. So without rising incomes to give D% a positive value, the LP Model is very painful.  If it is using a fixed rate of interest and the borrower pays 30% of income throughout the repayment period that costs 7.5 year's income having borrowed only 3.5 years' income. If incomes grow fast with the LP model, the lender gets little wealth back as for example in the above illustration.

Siegel's Constant and Real Economic Growth trends -
http://en.wikipedia.org/wiki/University_of_Pennsylvania

This is one of numerous published studies of the rate of return on equities, property etc. The measurements are in real terms not true rates of return, which is misleading.

If prices are rising at 5% p.a. and incomes at 8% p.a. then a real rate of return of 3% p.a. is needed to protect the wealth that has been lent. Equities tend to average a true rate of return of around 4% -5% p.a. or even less, as measured by Siegel's study.

This puts a roof over the top of true interest rates over the medium to long term, and the zero rate of true interest is too cheap because a person can borrow and invest in property and make a net profit out of the rental. This will cause inflation if it is sustained and in the absence of a wildly unbalanced economy like the world is seeing just now!