Rent or Buy Taking Control of Your Credit
Session Topic: Rent or Buy: Taking Control of Your Credit, Reduce Your Mortgage
Convener: Kevin Cox
Notes-taker(s): Esther Makkay
Money is a social construct and can be thought of as IOU’s. Our normal money is an IOU that issued by the government that says we can use the money to pay our taxes.
Banks today create most of the IOU’s. 97%+ of all money in circulation are IOUs issued by banks.
There is no reason for each of us not to issue our own IOUs. That is, one form of personal data is the IOU that we can control.
Bank IOUs are issued with interest attached. When a bank issues a loan to an individual the individual takes on the conditions of the bank issued IOU and agrees to pay interest on the IOU. Because interest is itself an IOU we end up with IOUs that compound in cost.
If we issued our own IOUs directly to a lender then we could issue them with different conditions including having no interest. Rather than interest to compensate the lender we could give the lender rent on the product or asset we purchased with the IOU.
An example of how to do this is being built. At the moment it is called Rent and Buy but will probably be called something else when finally launched.
The system looks very much like the current system because people understand mortgages and people understand rent. It can be thought of as renting money to purchase part of a house. The buyer buys part of the house with a deposit and the loan money is used to purchase the other part of the house. The rules of the IOU or loan are different.
1 When a repayment is made the money comes directly off the loan.
2 Rent accumulates until the loan is paid off and then the rent is repaid
3 Rent does not attract interest.
4 The Loan plus Rent outstanding is adjusted yearly (or monthly) for inflation.
These set of rules make a difference to both buyers and sellers. The total amount of present day funds transferred between buyer and seller reduces by the amount of interest on interest. By increasing the amount owed by inflation means that the effect of inflation on transfers is cancelled out.
For a 25 year loan at 7% the borrower has a reduction in repayments of 60% - but the repayment amount increases with inflation. However, for most borrowers their income increases with inflation and so the increased cost in present day terms is the same. If the borrower cannot increase repayments then the length of the loan can extended with no loss in value to the lender.
For a lender they receive a 6% return on the money invested that is inflation adjusted. That is if inflation was 3% then the return is about 9% fixed. This is a superior return for most annuity low risk products.
For lenders interest with Rent and Buy is classified as a Capital Gain while interest on a traditional loan is classified as income. In many countries the tax treatments are different.
The system should be operational towards the end of 2013.
Rent and Buy illustrates what can happen when we take control of our own personal data which in this case is our own IOU or own ability to create credit.