There are four words that strike terror into the heart of any experienced lender where personal clients are concerned. No, not ‘the FCA are here;’ not ‘answer needed this afternoon,’ not even ‘meeting at 16.00, Friday.’ No the phrase that makes strong men weep and women recoil in dread is ‘it’s our dream home.’ Such an innocuous phrase on the face of it and yet it implies a world of pain even as the words strike home, because you know that the light of intelligence in your clients’ eyes has died, reason has fled, and sanity is scrabbling for the last vestige of a toehold on their consciousness.
OK, perhaps I exaggerate, but not by much. As the dream home is so often a monster that consumes all in its path; nothing will stop your clients from buying that property, or if they already own it then retaining it, or, perhaps most frightening of all, building it themselves. Simple purchases are reasonably easily dealt with. The client can either afford it or not (although I do recall a case where a client paid a non-refundable deposit on their dream home before having a mortgage or bridging loan agreed and they could afford neither. Quite a costly mistake to make.)
A couple of examples come to mind:
First we have the clients who want to build their dream home from scratch, a reasonably regular occurrence. Now, self-build projects are not for the faint hearted as they are fraught with pitfalls for the unwary and often a prime example of where a little knowledge is a dangerous thing. The client will normally have a budget in mind, hopefully drawn up with input from their architect and builder to aid credibility. However, we are talking about dream homes here, and dream homes rarely adhere to budgets. This is because as the build progresses we start to see little tweaks coming in. That laminate flooring? Would Indonesian teak not look better? Kitchen tiles? So last year. Italian marble would be so much nicer. You get the picture. It’s what we lenders call ‘gold tap syndrome.’ It doesn’t happen with every development of course; certainly no more than 99% of the time - if you let it. So what, you may think? If they can afford it where’s the problem? Therein lies the rub, because with grim inevitability these extras are ordered and paid for before arguably more pressing needs have been attended to. Things like walls and roofs. That’s when you find the budget has been spent and you have a half built house. Albeit one with terrific looking flooring. So the lesson for lenders is always - always - to have control from the start which means employing project managers to manage the budget and ensure the bank is only lending money against the works agreed in the original schedule, so that the last pound is only lent as the builders pack up their stuff. Unfortunately, this doesn’t come cheap and can be a major cause of conflict with the client at the outset. After all, these monitors are working for the bank not for them, and that £15k could be spent on the latest home cinema system. Ignore the siren call. Never let the client’s dream home become your nightmare.
Second, and topically, readers may have seen recent press reports concerning a court case (on the merits of which I make no comment) where some lenders are being sued for selling products known as Shared Appreciation Mortgages. These were short lived loans in the late 1990s whereby clients with significant equity in their property were offered loans against them which would only be repayable on their death or earlier sale of the property. These loans could be used for property improvements or just to support the borrower’s lifestyle. No interest was payable. Sounds great doesn’t it? There was, however, a downside. The lender would participate in any increase in the value of the property between drawdown and sale to the extent of up to 75% depending on the level of equity at the outset, and this is where the dream home rears its head. The target audience for these loans was generally older borrowers on restricted incomes who weren’t ready to leave their forever home. Great for them so long as they can cope with the erosion of equity over time; not so great when they subsequently decide to move after all or for their offspring who later found that the £2M house they were hoping to inherit is worth significantly less in real terms because the lender is entitled to the lion’s share of the growth in value since the 1990s. But who is to gainsay the clients? Why shouldn’t they spend their money as they see fit, or make financial arrangements which might not be optimal when framed in pounds shillings and pence terms but which allow them an emotional security which overrides cold logic?
Well dear reader you know the answer to that which is regulation. As regulation isn’t written with emotions in mind. Indeed it is specifically written to protect borrowers from themselves. Perhaps rightly so, perhaps not. We know that regulatory regimes operate like a pendulum according to the whims of government and whatever the latest miss-selling scandal happens to be. One day the free market rules, the next we’re all placed in the same strait jacket. However, it’s the lender who has to explain to their client why their dream home is out of reach, or why they have to sell up because loss of equity or interest roll-up isn’t in their best interests, even if they can patently afford it in the long term.
There are no easy answers. The utopian view would be to treat everyone as grown-ups and let them make their own decisions (where these can be made on an adequately informed basis) and then suffer the consequences of their mistakes. Nevertheless along will come the next unscrupulous firm leaving a slew of innocent victims in their wake and utopia won’t look so great anymore.
At the end of the day all we can do is muddle through and play the cards as they are dealt. However, take my word for it, when you hear those four little words - run, don’t walk.
October 2025