BOOK CH 5 - appeal

Edition 2

A proposal to form a study group for the Financial Services Sector
With a view to opening the space
for a trial of the ILS Model

To simplify all kinds of lending and borrowing and hence reduce the risks to both parties by adopting an index of average wage incomes as the basis for repayment.
A similar model has been operating successfully in Turkey since the late 1990s
To form a study group made up of suitably positioned readers of this chapter to analyse both the economic theories and the practical issues. The group will be comprised of representatives of financial institutions that wish to increase their knowledge and maybe explore the business opportunities which are presented, and which have already been approved by numerous academics with many years of experience.
This essay was originally written as a stand-alone script but it also fits as a form of revision of the earlier chapters.

If you are reading this script and you think that you may be able to take part in a study group anywhere in the world, please contact Edward C D Ingram and discuss that. He may be contacted live on Skype as edwarding2
Or by email at

Please turn the page...

The technology changed all the page footnotes to end notes.
I have now moved them all to end of paragraph notes.

The plans are in two parts as outlined at the end of this document.

PART ONE  -  to get government approval for a trial

PART TWO -  to find institutional investors to put the ideas into practice.


It is better to know, to understand what is going on, and to participate and to steer, than to have to catch up later. The work done is likely to change the entire financial services sector, introducing safer financial products and services – a key demand of the clients out there, and a key objective of financial services regulation.

It is expected that the new financial products will be a part of the future, if not all of the future, because adopting them simplifies everything, is more socially acceptable as they help people to retain their savings and wealth, protecting them when borrowing, and they will profoundly improve the prospects for faster economic growth.

In fact this kind of financial stability is what the central banks have now decided to make into a main pillar of policy. So how can they refuse to collaborate?

By adopting an index of average incomes as the basis for preserving wealth and as a basis for repaying wealth that has been lent, everything simplifies, and risk levels drop dramatically.

The theory has all been worked out as explained in this book, and for many years academics and others have urged that this new mortgage model be tried. That is the final objective of having a study group – to test the new mortgage model or to get someone to try it and test it.

A similar model[1] but without the essential refinements that make the new model what people say may be the best mortgage model ever invented [2] has been operating in Turkey for several years. That should also help us to get clearance from the authorities to implement the new model and test it.

[1] Google search under “Kanak Patel Turkey Civil Servants Wages Linked Mortgage” for the latest references.

[2] See these two previous (to the above) blog pages:


One reader of an earlier draft made a comment that, because the proposal herein is to lend no more, nor much less, than around 3.5 times the borrowers’ net incomes for housing finance, based on safety reasons, the trial could not be done in the UK at present. It would not be able to lend enough to be competitive.

This comment has given rise to APPENDIX 2 which shows that one significant advantage of adopting the new Ingram Lending and Savings (ILS) mortgage model can save those lenders that adopt it from much of the pain expected when interest rates in the UK rise.

The ILS model can be attached to existing mortgage contracts as an escape option that manages the rate of increase in the repayments and keeps them affordable whilst still repaying the mortgage on time, and still giving the lender the option to manage theior incoming cash flow so as to prevent any possible ‘run on the bank’.

There are ways to use the knowledge gained from studying the whole book, which the study group will be asked to do, which would enable the currently low rates of interest to rise without creating any major adjustment problems for the economy. Rather the reverse. Keeping every participant, including every financial institution, safe from interest rate risk is what this is mostly about.

The method will be for participants to learn and improve on Edward’s ideas in group discussions held periodically and prioritised for attending.



A new equation for repayments of Mortgage Finance, or for any other debt, has been created by the writer, the proposer and volunteer study group member, Edward C D Ingram.

Based upon that equation, a new mortgage model called the Ingram Lending and Savings (ILS) Model has been designed and tested against historic and other appropriate data.
As already mentioned, it is said by experts from the lending industry to be the most advanced mortgage model ever invented, that it would calm whole economies, and make them more prosperous.

The equation contains one more variable than is usual. This variable is the rate per annum at which the payments rise or fall relative to average incomes. If the rate at which payments increase is less than the rate at which average incomes are rising this positive difference is called the rate of Payments Depreciation, D% p.a.

Payments depreciation can be positive whether incomes are rising, falling, or standing still. As long as long as the payments are falling faster than average incomes, or are rising less quickly, payments depreciation will be positive.

And if the rate of payments depreciation is sufficient, that will largely prevent any significant build-up of arrears cases, especially in the vulnerable early years of the repayments.

Everything else in an economy costs proportionately more as average incomes rise, or they would do so if the supply of them was constant.

Rentals taken as a whole over an entire nation tend to rise as average incomes are rising, or maybe (reluctantly - stickily) rentals can fall if average incomes are falling. Currently, mortgage costs go an entirely different way, moving upwards or downwards at least ten times faster than might be expected; and that is the cause of much economic and social turmoil, including the formation of property price bubbles.

This makes no sense economically because it puts people out of work only to re-instate them later when the cycle reverses, and it makes no sense as a way of pricing costs in response to the ever changing level of incomes that drive demand. The price is there to balance supply with demand, not to race ahead or to drop behind, creating property bubbles and crashes and all kinds of mayhem in the process.

The idea of the ILS Mortgage Model is to ensure that the cost of the payments for an individual borrower should fall every year as a fraction, or percentage, of the average borrower’s income, say by 4% p.a. or 12% every three years. But overall, taking all such mortgages into account, total remittances to the whole mortgage (and rentals) sector should broadly follow the rate of increase of average incomes, somewhat like what happens to almost all prices, including rentals, all else being equal (especially no increased supply); whereas normally, with the current mortgage models, the total remittances to mortgage repayments may rise by 10%, 20%, 30% or more, only to fall again just as fast later.

That is why the sector booms and busts alternately. And it takes spending to and from the mortgage and construction sectors and sends it to and from other sectors in the process. For an economy to function smoothly, all sectors should slow or speed their spending / income proportionately, not have one sector rushing up and down like that and distorting everything else.

Compared to an ILS mortgage or any other mortgage, rentals cost less than mortgages initially but as just mentioned, the cost of a rental has a tendency to be carried upwards as average incomes increase, at a rate which we call Average Earnings Growth (AEG% p.a.). Please note that AEG% p.a. is the rate of increase in an index of average incomes / earnings and is NOT the rate of increase in prices; it is not CPI or RPI. The study group will be discussing the best composition for the index.

Average rentals may rise as average incomes increase because as incomes rise people have more spending capacity and, given a limited supply of properties, they can pay a proportionately higher rental. To create a point of reference one might say that a ‘standard rental’ rises at AEG% p.a. but the cost of an ILS Mortgage would rise 4% p.a. less quickly. In fact, as explained earlier, payments demanded by an ILS mortgage may actually fall every year if incomes are rising by less than, say 4%p.a.

Whatever is happening to incomes, the ILS Model captures the total amount of the borrowers’ incomes that can be captured without undue hardship, arrears, or stress for the borrower.

Typically an ILS mortgage would cost about 30% of net spendable income in the first year whereas a rental might take 70% of that, at around 21% of net spendable income.

The outcome of the two arrangements may be seen in the FIG 1 sketch below. A rental may cost more than the mortgage after 12/ 13 years.

FIG 5.1 – ‘% of income' costs compared – Rental v ILS 

The shape of the sketch is not altered if average incomes are rising, standing still, or falling. It is the same, it still costs 30% of income and falling to around 11% of income on average, over time; and this means that the same amount can be lent no matter that incomes are rising one time, standing still, or falling another time: around 3.5 times the borrowers’ net incomes can be lent on the above basis. Remember, in an economy, everything, all spending is in some way carried along by incomes and as aggregate income rises (or falls) over time; everything needs to stay in balance.

Given that the total amount of income lent is not too much, say 3.5 times the borrowers’ net incomes in the FIG 1 case, there is a cushion of white empty space in FIG 1, above the shaded area. This is created by the rate of payments depreciation of payments (the slope) and is there to prevent payments fatigue (too much cost, too much ‘% of income’ spent on mortgage payments, for too long).
The other main variable is the interest rate which could add more to total costs.

The true interest element is the marginal rate of interest above a selected index representing Average Earnings / Incomes Growth (AEG% p.a.). It is not the nominal rate of interest because we are looking at the cost-to-income (% of income) of the repayments in this case.

If incomes rise at AEG% p.a., adding that same AEG percentage to the debt by adding interest, this does not increase the debt faster than average incomes are rising, and so it does not increase the cost-to-income of repaying the debt; at least not for the ‘average’ borrower.

Remember: this is NOT the marginal rate above the CPI or any other prices index, it is the marginal rate above AEG% p.a. – an incomes index, selected for the purpose.
In the above example this marginal (additional) interest rate is 3% p.a.
It is called the true rate of interest.
If the true interest rate rises above this 3% p.a. rate, the 4% p.a. downwards slope of repayments depreciation shown in the FIG 1 sketch reduces. In that case it costs even more of the borrower’s income to repay the debt. The white area of the chart reduces and the shaded area increases. Total cost to income increases.

This is action of the true rate of interest in increasing the shaded area, applies to any mortgage or any debt – the differences lie in the shape of the shaded area – it is under control, keeping the payments affordable, or is it not under control? That is the difference between the mortgage models.

And we should all ask, “Is the total amount lent greater than can be repaid at the median rate of true interest?”

The idea of the ILS Model is to lend a limited income multiple, like 3.5 years’ income, which will ensure that even if the true interest rate increases, this slope will remain in the downwards direction. A 3% true interest rate is about the average true rate experienced in the UK for Mortgage Finance during the period 1970 to 2002. A graph can be seen in APPENDIX 1.

The relationship between the true rate of interest and the slope is simple: if the true interest rate is fixed, the slope is fixed at 4% p.a. payments depreciation, D% p.a., as shown in FIG 1. If the true rate rises by 1% from 3% p.a. initially to 4% p.a. then the slope (payments depreciation rate) drops by 1% from 4% p.a. to 3% p.a. [4]

There is a fixed one-on-one relationship between the true rate of interest, I% p.a., and the rate of payments depreciation, D% p.a., the slope.

 [4] This relationship comes from the equation P% = C% + D% + I% that will be explained IN A LATER CHAPTER and of course, to the study group, whereby if I% varies and we do not want to send C% (capital repayment) or P% (the cost of the payments) off course, then D% must change to neutralise the change in I%.

The question that this raises is by how much the true interest rate might rise, and having risen, how high could it stay? Can it rise so far as to extinguish the positive value of the downwards slope – the positive value for payments depreciation, D% p.a. in the equation?

The mathematics paper explains all of this. We do not want P% to jump up – it is the rate of the payments currently being made expressed as a percentage of the debt owed. We do not want C% to alter – it determines how many years the debt will take to repay.

This equation applies to ANY mortgage model. The difference is how they allocate the figures to the variables. Do they manage D% appropriately, or not? And if so (they currently don’t) do they start with a high enough P% so that they can then make D% high enough at outset to cope with a higher level of I% if that prevails later? (They don’t do that).

What the equation and the past data tests done on the ILS Model shows is that if the amount lent in the above illustration is 3.5 years’ of the borrower’s net spendable income[5] then such variations in the true rate of interest can be managed. At least that applies if the median rate of true interest was around 3% p.a.

[5] Comment from Graham Hollick – a retired CEO of a bank and past president of the International Union for Housing Finance: 

Net income has or will have a serious effect on the borrowers' level of borrowing as this takes into account pension contributions and taxation, so denuding the propensity to borrow and has to my knowledge never been a factor to lenders

Reply - It is true that to lend more would impinge of the capacity of borrowers to save for retirement and to meet other expenses like school fees. This is one reason for not lending over 30 years.

When setting the payments depreciation rate (the slope) at 4% p.a., there is enough white space above the shaded area to be able to cope with those variations in the true rate of interest. To understand why, first consider this:

The amount by which the true interest rate can rise and stay higher than its mean level for long is not much, and the amount by which it can fall below its mean level and stay there (if there is no Quantitative Easing (QE) type of intervention keeping interest rates artificially low) is not much. A total range of around 2% or 1% above and 1% below the median value looks likely to be the average true interest rate over a longer period.

The study group will be looking at the detailed evidence for this in sessions, and as presented in the book in later chapters. Those chapters include a way of estimating the median value of I% as well as studies in which that estimate turns out to be far from the correct figure, yet the ILS Model can still survive if it is set up sensibly. Whatever happens, the ILS Model, taken with those precautions, is more robust than any other model yet seen.

The purpose of the study group is to understand all of the researches already done and to extend those researches into a proposal to put to a government in order to test the ILS model.

See the PLANS at the end of the script for more details about who may participate and how the new mortgage model may be financed.

It has been found (using past data in the later chapters of the book) that wilder movements in the true rate of interest, being temporary, can either be accommodated by varying the slope more or by varying the projected total repayment period. But basically, the overall result is likely to be the on-schedule repayment of the debt and an average rate of decline in the cost of the payments as a proportion of income (payments depreciation) of around 4% p.a. much as originally planned.

That is, as long as the original amount lent for this given level of payments is not far from the 3.5 times income suggested. To enlarge that multiple would be to increase the volume of the shaded area with more debt attracting more interest. There is no space available for that. This is why, when lenders lend more as nominal rate of interest fall, they get into difficulties when interest rates rise and return to mean.

The interest rate cycle does cycle, and therefore it is not sensible to lend much more when true interest rates are low. Lending more at such times will inflate property values which will later crash down, and because when true interest rates rise, it will be found that too much has been lent for the well-being of the borrower’s finances, raising arrears rates and administration costs. Lenders that do that would become less profitable and less competitive. Their reputation would suffer.

“Buyer beware” is not a popular concept sought after by the public when it comes to dealing with their bankers and other financial institutions. Rather, it contracts the banking industry, leading people to seek finance elsewhere. And what about the regulators? They may set upper limits to what can and should be lent as a multiple of income to protect both the public and the financial sector. A consequence of doing that and making the repayment levels safe, may be a reduction in the mandatory reserve ratios for a number of financial institutions and an increase in the banking industry’s share of the nation’s financial services industry. Here is an interesting study on how that share has been reducing in the USA.

Neither is it necessary to lend much less when interest rates are high relative to the median value because interest rates including true interest rates in particular always revert to mean. There is no need to increase the area of white space in FIG 1.

What usually happens when nominal interest rates are high but true interest rates are not higher than usual, is that lenders reduce the amount that can be borrowed and they allow a higher inflation rate (of incomes) to increase the rate of payments depreciation. The shaded area reduces a lot and loan sizes are not enough to support the property sector.

What this new consistency in the amount that can be lent safely means, is that property prices will not be inflated by over-sized mortgages (as happens today), nor deflated by too small mortgages where inflation rates are higher, and collateral security should be good. That is, provided that all lenders are adopting the same model and / or policies of safe lending by limiting mortgage sizes to around the same 3.5 times income.

For developing nations it means that more can be lent and it can be lent more safely too. So the housing sector, a key sector for any economy, can be stronger.

No matter that a lender may not be using the ILS Model, the maths of risk exposure if these guidelines are not adhered to, is the same. The total amount of income that can be extracted from borrowers with low arrears rates over a 25 year period does not alter.

If more is lent then the shaded area in FIG 1 has to increase and there is little room for doing that if on average, Payments Depreciation (the slope), is to remain close to 4% p.a. And if variable rates of interest are used by the conventional mortgage model, the slope downwards can become an upwards and downwards slope. In that case it is not sensible to lend even as much. See FIG 2

FIG 5.2 – variable rate traditional mortgages can push payments up and down.

For all lenders and for all borrowers the true rate of interest is a material factor, as is its mean value over a cycle. The mean value governs how much income multiple it is safe to lend.

Mortgage income multiples and the downwards slope of payments is something to discuss with regulators.

When it comes to BASEL III reserve ratios, the question to ask is “What are those reserves needed for? If it is risk, where is the risk now? There are going to be almost no arrears and there is reliable collateral.”

I have this second comment from Graham Hollick, an ex-president of the International Union for Housing Finance and an ardent supporter of the ILS Model. (Ed just remember that lending is not totally constrained to mortgages but unsecured lending and reserves needed for deposit protection against unwise other investments so it may be wise to highlight this). This is true and it raises issues for regulators to consider as well as for the sector to consider. Both are seeking to create safe and reliable financial services industries. Everyone will benefit from greater safety and greater trust between financial institutions and the public.


In my opinion, each kind of risk from each kind of financial activity indulged in by a financial institution or a conglomerate can be merged into a single organisation that does everything, but if that is done whilst other organisations separate out their activities and so separate out their risk costs, then those business activities that have low risk costs will under-cut the those that have merged and combined all activities into one institution. and by keeping things simple in this way, the considerable organisational complexity risk will reduce too.

It is better for a conglomerate to be a shareholder / owner of each separate institution, each keeping its own activities and its own accounts simple.

Regulators may think that the risk with ILS is that the lender may not be able to balance the supply of funds to lend with the demand for them. The answer to this is that, now the arrears risk is little or nothing and collateral security is safe, true interest rates can seek out the level at which the supply of funds needed by the lender matches the demand for them. That is basic pricing theory – when prices are free to move, they move to create a balance between supply and demand. The movers are, of course, the lenders, but in an environment that is set by external forces such as the Central Bank and the prevailing rate of AEG% p.a. they can only manage the interest rate relative to the prevailing rates in the economy so as to capture more, or less, funds for lending.

With strong confidence levels in the new model there should not be any significant problem in attracting more funds by raising the true rate of interest and thus balancing the cash flows and the supply of funds with the demand for funds. A lot of research has gone into answering that question.

When it comes to the study group talking to the government’s economists, it should be pointed out that the world’s economies have been put in jeopardy largely by a failure of the banks to manage these ‘loan: income’ multiples and the related repayment and interest rate risk functions and as a result they have caused property prices to inflate and become insecure. The current model in use for variable rate mortgages is highly unstable and is not appropriate. And it is the product of stringent regulations on the amount of the repayments being related to the nominal interest rate at all times. That is the wrong index.

Likewise, the currently approved fixed interest mortgages are vulnerable if the average income of borrowers does not rise much or if the average of borrowers starts to fall as has happened in many parts of Europe.

Then the slope on the sketch (the slope for the fixed interest rate model) can level out to fill all of the white space in FIG 1, or even start rising as it has done in some parts of Europe.

By following the new guidelines created by the new maths, mortgage sizes will be better under control and arrears rates will drop and stay down. The more stable property market, if most, or all, lenders adopt the new ideas or if they are imposed by regulators, will allow lenders to take a smaller deposit; and having control over the arrears rate will allow them to accommodate the ever changing market rates of interest needed to balance their cash flows without running into arrears or cash flow problems.

This will remove one of the well-known central bank dilemmas of interest rate policy: when interest rates need to rise they can do so without creating a crisis in the property sector. When interest rates need to fall, they can fall without creating a property price bubble.

Risks for borrowers and for lenders will be lower; the construction industry should be less exposed to varying property values and extreme variations in the level of demand. More houses can be built more cheaply, and bought with lower deposits.

Housing is an important sector which is related to economic growth in multiple ways. The more there are of owner-occupied houses, the more collateral security is formed for starting new businesses, and the more activity there is in the property sector, and the more downstream jobs are created. A healthy and steadily growing property sector is important.

When it comes to running the trial and considering the competitiveness with other banks / lenders, the new ILS model is more competitive. If the ILS Model is competing because the current models are also in use, when interest rates are low and competitors are lending too much, this ILS model can lend just as much but at lower risk because it manages the rate of payments depreciation; and so it is competitive. The level of payments depreciation falls but it does not vanish and the model is stable.

When interest rates are rising, the current models cannot lend as much, and they are unable to offer as much interest to depositors as the ILS model can offer because, in the case of variable interest rate mortgages using the current model, raising the interest rate will increase the arrears rate too fast.

Tests have shown that the ILS model (if now fully approved and widely in use by the financial institutions) can then take over other lenders’ loan books and rescue them. For traditional lenders offering fixed interest mortgages, usually less can be lent.

This ILS rescue function (a take-over of a mortgage from another lender using the traditional mortgage model) is an interesting option that can be added to a traditional variable rate mortgage rather than waiting for disaster to happen. When this is done it is called an ILS Hybrid Mortgage – these kinds of descriptive words are not mandatory for lenders to use when marketing their loans. It is the proposed academic terminology.

A rescue option may also apply to fixed interest mortgages that are in trouble when average incomes are falling or not rising much. But then there may be problems with raising funds to lend because in that environment the true rate of return on fixed interest mortgages will be exceptionally high: say 3% nominal interest with incomes falling at 4% p.a. gives a true rate of interest of 7% p.a. which is far higher than the long term rate of return on equities in developed economies.

GOVERNMENT REMEDY – using Wealth Bonds
The higher the true rate of return the higher the risk and the more distorted markets become. Governments with this kind of situation (e.g. in Europe now) should take a closer look at the whole debt market including the structure of their own borrowings because it is their own fixed interest debt that is causing the high true interest rate problem.

Instead of using fixed interest bonds they should borrow using what I call ‘Wealth Bonds’. These are index-linked to AEG% p.a. or a similar index that investors (lenders to government) will trust. The AEG-indexation is a fairly good proxy for the movement of their own net tax revenue, and as such will help to stabilise the debt: GDP ratio. Paying 1% true interest as a coupon would transform the prospects for economies in Europe. And these bonds would be well suited to pension funds.

The same applies to any nation – a wealth bond takes away most of the wealth risk of lending to governments and as such wealth bonds can be sold at a premium. That is certainly the case when interest rates are low and true interest rates are negative. When true interest rates are high a wealth bond can help to break a vicious circle of rising risk, rising nominal interest rates, and consequently falling average incomes and GDP.

It is difficult to think through a falling incomes scenario – is the investor getting a good return if the value in money terms may even be falling? If all incomes are falling then GDP is falling, but the share of that GDP will be what counts – is everyone getting the same returns and costs relative to one another? Relative to each other and based on market forces, borrowers would be giving their share of the costs of borrowing and investors / lenders would be getting their share of investment returns and keeping their share of the falling GDP / wealth of the nation.

As one reader wrote to me: “It is just a defined repayment schedule against earnings.“

The investor gets the promised share of the borrowers’ incomes and the borrowers get to pay the promised share of their incomes. What more can be gained by any deviation from this path?

Even a government’s own fixed interest borrowings should come under review for exactly the same reason as illustrated in FIG 3 and as indicated in the above recent paragraphs.

Fixed interest can be very dangerous. Borrowers and lenders alike are very interested in a lower financial risk and reduced arrears and administration costs. And that goes for government borrowings as well. Having this elephant of a high true interest rate in the room in Europe is going to distort all financial markets, hit government budgets very hard, hit credit ratings, and make difficulties for businesses seeking to expand. High true interest rates are not good for business borrowing.

It will be shown in the later chapters of the book that governments and financial institutions can both use an index-link-to-AEG (wealth bonds) in place of the core AEG% p.a. interest rate, adding the true interest rate as a coupon.

If incomes are falling then the core rate of interest (AEG% p.a.) becomes negative, while the fixed true rate coupon prevents the true rate from rising – remember the true interest rate rises when nominal interest rates are fixed because the true rate of interest is the difference between the nominal interest rate and AEG% p.a.

There is no difference between a nominal interest rate of AEG% + I% true interest and an index addition to debt of AEG% + I% true interest coupon. The only difference is that AEG% can go negative without causing a problem.

When the market rates of nominal interest are negative – below AEG% p.a. such bonds, issued for funding government and the private sector, can be sold at a premium. They will still be competitive. They will still pre-define the cost-to-revenues of their borrowing. All parties know where they stand in cost and in benefit (investment returns) terms.

The risk of major arrears when using the ILS model is so low that a unit trust / mutual fund could be authorised to administer everything. They would use experienced bankers and they would offer investors in the units, cash deposits and fixed true interest rate, or index-linked bonds to raise the money depending on what guarantees were offered – well a unit trust does not offer a guarantee – it offers an expectation, so the risk is all transferred to the investors in the units.

Banks could create unit trust subsidiaries for lending – if authorised, of course. That arrangement takes away the reserve ratio issue. The banks just administer and the risk is taken by the unit holders.

Those ‘fixed true rate deposit bonds’ would give investment returns linked to AEG% plus a small fixed true rate of interest in normal economies; but as already pointed out, they may also be sold at a premium in very low interest rate conditions such as are current in many of the world’s major economies.

When the true rate of interest is fixed in this way, by a bank, or any other lender, the rate of payments depreciation for the borrowers (the slope) is also fixed and so the total rate of ‘wealth’ transfer from the borrower to the lender / bond holder will be pre-defined. The rate of wealth transfer from the borrower to the lender is pre-defined by the true rate of interest, which is fixed. The explanation of that is covered and illustrated in chapter 4 of this book.

Pension funds could offer these mortgages or buy the ‘wealth bonds’, the generic name given to bonds that are index-linked to AEG% p.a. That is a perfect way to reduce pension fund liability risk where the liability to the fund is the ultimate pension that they wish to deliver. People want a pension fund that keeps pace with rising incomes (not prices) and that can deliver a pension that is related to pre-retirement income in some way.

In fact, as mentioned at the start of this chapter, every price and every investment should have some kind of relationship to AEG, for if not, the balance in the economy will be disturbed. In effect, AEG% p.a. is the rate of devaluation of money.  Everything needs to compensate for that.

In summary money is lent / invested in the Defined Cost Mortgage and the Bonds are called Wealth Bonds because they protect the wealth (income) that has been saved and invested in them. Pension funds currently have no safe investments that keep pace with AEG% p.a. but that is exactly the kind of secured investment that they need most.

The independent financial advisers that I have consulted all seem to agree. They would also offer wealth bonds to clients just for their personal savings.

There is a well known formula that advisers have adopted as a guideline whereby the percentage of a person’s life savings that should be invested in equities should reduce by 1% per year of age as they get older. The remainder needs a safe investment such as a wealth bond so as to protect the value that has been accumulated. By age 60 the majority of the portfolio should be in a safe haven. And by that age, the total wealth involved will be close to the life-time maximum.

This is one reason why investing institutions of all kinds may be interested in participation in the study group. All investors are interested in preserving some of their wealth, the more so the older they get.

The pension fund would get an investment that rises as fast as average incomes plus some interest. The borrower would get a guaranteed and constant rate of payments depreciation (the downwards slope) compared to a ‘standard rent’ based on the average incomes index.

If governments join in by offering AEG-linked bonds, pension funds, annuities, and the public, can all be interested. The safety of the investment will keep the cost of borrowing to a minimum. Maybe a 1% true rate of interest – a 1% coupon payable would be enough.

When a fund manager seeks to increase the cash inflow from bonds into a fund above that 1% p.a., governments can offer to pay down some capital with each instalment of interest. They can cover any capital shortfalls with new issues. Some of those capital repaying bonds may have a use for creating safer lifetime and temporary annuities.

As long as the maths of risk management (arrears management) is adhered to, ILS Mortgages can take a number of formats. The public may be more easily persuaded to go for the usual (cheap) variable rate mortgage if there is an ‘escape clause’ built in, meaning that the ILS option is there to take over (rescue) if interest rates rise by more than a certain amount.

A rent-to-buy option can also be used in that case or on its own, as the original plan. The maths is the same and the risks are about the same. It means that the borrower will be less concerned with the now invisible capital debt, more with the affordability and duration of the payments.

So many people from academics to bankers have asked when this model will be tried that it has become a kind of background noise.

The South African Treasury, which is only where I am currently based, (this study group can be launched anywhere or even in more than one nation), says that they will listen to the legislative and other needs of the model when a serious proposal is brought to it by a team of bankers, or financial institutions, or by the major banks in the country.

I PROPOSE TO ACCEPT THAT CHALLENGE. Are you able to help? Can you make your financial institution interested? Financial advisers are also welcome.

Since the major banks feel they have enough on their hands already and have not got the spare capacity to even look at this, the proposal now is to form this study group of bankers and economists, actuaries, risk managers, compliance officers, financial advisers etc, to put a plan together and to put it to the South African Treasury, or any other nation’s treasury, and their other related authorities.

The team does not have to be located in any particular nation. All nations may be considered.

I will be happy to participate as group leader in any other country where there is enough participation on offer and the treasury has stated that they will do the same. Please ask them if they will collaborate in this way, let me know, and then we can form the team.

Initially meetings with remote people can be handled very effectively (in the same room effectively) with Skype and I am happy to help people to learn the ‘how’ and the ‘why’ of that. We can share computer screens and use cameras as well as talking about what we are seeing on the screen, including the pointer.

There are reports on the effectiveness of such arrangement in the discussion groups at LinkedIn. There are guidelines laid down to make that work. And they can work.

The team is likely to start small and to build slowly. An existing small team DRIVEN BY REALLY COMPETENT PEOPLE, will attract new members more easily.

The final team must be diverse having skills and knowledge in all of the relevant disciplines. It will meet as many times as it takes to get everyone to agree on a written report to submit to the Treasury and other relevant authorities with a view to getting permission to try the ILS Model.

Any team that looks as if it is making a serious effort will raise the question of whether they have the financial resources – the backing from their respective financial institutions, to have a regular, on-the-ground meeting place.

In favour, is the fact that Turkey is already using a similar model linked to Average Wages but they have not included the vitally important downwards slope of payments depreciation.

It is basically the exact same model that I invented and published in the UK in 1974 as the Chairman of the Housing from Income Committee. In 1975 I wrote a letter that was published in The Times on 11th April, saying that the model needed some further development.

That further development work was eventually done at my personal expense and it has already been reviewed by a diverse committee of experts / study group in Zimbabwe. See PART 2 of this Blog page. (Use the link). A bright green light was given but Zimbabwe was not fertile land for such a new idea at that time. And being short of national savings funds, Zimbabwe continues to lend at true rates of interest that are prohibitively high in US$.

The Zimbabwe experience and what lenders did to survive the hyper-inflation has led to my adding a clause to contracts that protect both investors and borrowers in such an event – each side, borrowers and investors / lenders, insures the other during such periods.

After that committee approval, the ILS Model was taken to the Institute of Actuaries in London and a further approval was given in writing as seen on the SAME Blog page in PART 1. The page is entitled  SOME ENDORSEMENTS.

Warnings were issued to many government agencies in the UK and the USA about the coming crisis of 2007/8, but lenders were not interested.

They seemed to be saying that there was no problem – in fact I was told that I was out of date: lenders had ways of insuring themselves from such disasters but no mention was made of the safety of borrowers, nor the good of the economy!

Once the necessary permissions are granted then members of the study group or their institutions that are interested will be in a position to make a business plan and to raise the funds needed to launch an ILS Lending and savings institution.

Those in the study group and their financial institutions will both gain a great deal of knowledge that will open doors and business options that other institutions may struggle to catch up with.

If a new ILS lending business is set up and funded, it can be owned by a selection of institutions, and later merged with an existing institution or used as a model. Many options open up.

That is one of many reasons why any financial institution might wish to appoint someone to this study group. The new knowledge about the economics, the investment and pension fund and other opportunities and the opportunity to lend safely and continuously in a safer and better performing economy, are all reasons to be on the inside track.

In case you are not already reading this from the website / blog:

Edward’s website can be found here:

His personal CV outline with some details of the Turkish Model can be found here:

His draft book, starting here, (use the link), introduces him as follows:

You cannot over-sensitize and mis-price $300 trillion worth of debt and by implication at least three quarters of the world’s wealth and investment assets, and do so in a constantly disruptive and unstable way, and NOT make a mess of the world's economies.

This is a draft of the first pages of a book about practical ways to re-think economics and get back on track without a crisis. It takes a new and scientific look at the way we do the pricing of debts and currencies and finds that neither of these is done in a way that is consistent with the basic principles of pricing. Prices are intended to balance the supply of goods and services with the demand for them. What is happening in practice amounts to very significant deviations from that path, deviations which can add and subtract $trillion to and from the wealth of the world, and it can happen very fast.

The solutions are both practical and remarkably simple. As one reader, Gilberto Emilio Hernandez Negron, wrote in a pictorial way:

It is a very simple and far reaching scientific discovery (at the e=mc2 level). The beauty of it is that it is not that hard to “fit” it in. It does not require changing banking, financing, trading, taxing [much], regulation [much] or international politics. It gives back to parties in a financial transaction a solid basis to negotiate upon. 

It just gives back to the driver, the ability to really drive the [economic] car. You can still crash and have accidents but you can steer, brake, stop and accelerate assisted by good road signage, power steering, Traction Control, and anti-lock brakes.
The new science to be found between the covers of this book is based on the first principle that economists were taught...economics is about finding a balance between supply and demand; and that is what we are failing to achieve with our present economic structures in banking, borrowing, and currency management.


As an experienced practitioner the writer, Edward C D Ingram, is well placed to write this book.
He draws upon his experience as CEO of both his own once famous UK Financial Advice and Management Company, Ingram Investment Services Ltd, which set new standards and introduced new financial products in the UK.

Later, Edward was CEO of the Unit Trust Subsidiary of a Financial Holdings Company in Zimbabwe. He was given an office without furniture, and a budget. The resulting unit trusts became the leading brand and Edward’s presentations on television changed the mind-set of the nation which had barely heard of Unit Trusts till then. 

He also spent some time as a product development consultant with a major UK insurance company which was looking to gain knowledge of the mortgage market and other ways of offering mortgages. The marketing department was impressed but the directors did not enter the mortgage market. 

The new mortgage model as it existed at that time still needed development as was announced in a letter written by Edward as head of the Housing from Income Committee and published by The Times on 11th April 1975; it has since then been re-invented in very similar (but unimproved) form and implemented some years ago in Turkey as a housing finance model for Civil Servants.[1] 

[1] Google search under “Kanak Patel, Turkey, Civil Servants, Wages-Linked Mortgage” for the latest references.

This is an ‘index-linked to wages’ mortgage pricing model for civil servants using an index of their wages as a template both for repayments and for the base / core interest rate.

By 2004 Edward had presented his updated ideas - those contained in this book - to a top-level study group in Zimbabwe. They were unanimous, saying that the ideas should be published and tested. The composition of that group was the highest level that could be found in that country as explained in PART 2 of the SOME ENDORSEMENTS page of this Blog.

At subsequent university presentations the majority of lecturers in their several financial faculties including banking, business management, and actuarial science, wrote the same thing on their 30 or so feedback forms.

The problem was that Zimbabwe was not a place where any test of the new mortgage model could be carried out, and the poor reputation of the country as a whole blinded the world's major economists to the fact that those people are among the best educated people in Africa - by common consent.

The rest of the world was busy blowing property price bubbles and government bond bubbles, and saying it did not worry them, lenders were insured against such risks....that Edward's all-embracing equation for lending, showing how dangerous that might be, was out-dated...oh – and never mind the borrowers, we will be OK!

How wrong they were!

If the borrowers are not safe, neither are the lenders, nor is the economy.

The yellow line represents the true interest rate history for UK Mortgages.

Rates were clearly distorted by the inability of lenders to raise interest rates during the inflationary period and thereafter a periods of high true interest rates were needed to rebuild the lost assets.

After that the current period of exceptionally low interest rates distorted the world’s economies.

FIG 5. 4 - UK True Interest rate history 1970 - 2002

The Low Interest rate Trap[7]

This is based upon the Blog page entitles Low Inflation Trap – a similar essay were originally published by Edward Ingram more than ten years ago.


One reader said that the ILS Model could not be tested in the UK just now.

The reason he gave was that house prices and mortgage multiples (of income / mortgage sizes) are much greater than 3.5 times income.

In fact, the IMF Country Report of July 2012 said that house prices in the UK are around 4.5 times income but that on average they used to be 3.5 times income.

This is exactly the problem on the housing finance side that confronts tapering of the QE – escaping form the low interest rate trap, which makes it difficult to raise interest rates without creating a crash in asset values. See the footnote below for further details.

The ILS Hybrid Mortgage arrangement solves that problem, making higher interest rates affordable and limiting arrears, by just reducing the slope of payments depreciation; and it clears the way forward for both new and existing borrowers.

For existing borrowers the ILS Rescue option clicks in. For new borrowers, the authorities may like to insist that the currently inflated mortgage sizes (multiples) be retained by as much as it takes to support property prices in the UK at their current money cost level (not income multiple level). Then incomes can catch up, deflating the bubble. After that, the 3.5 times income mortgages recommended can become the standard, preventing future property price bubbles.

As you know, the sensitivity of government bonds and the sensitivity of the housing sector to interest rate rises is the main problem for tapering.

My solution is to use the ILS Model as just described to stabilise the housing sector, and to replace fixed interest bonds with bonds index-linked to AEG. The present level of government debt can be reduced this way because a safe investment is worth more to investors. AEG-linked bonds can be sold at a premium.

Now think about it – from those government bonds we get safe investments for pension funds (a link to incomes is ideal) and safe borrowing for government (the cost-to revenue is small and stable), and we get safe house prices and safe mortgages. We prevent future asset price bubbles from forming simply by using these new debt structures. There is no future need for interventions, just regulation for mortgage multiples.

If we just extend that kind of safety to business loans (easily done) it is hard to imagine why confidence or the lack of it would retard the economic recovery. We escape from the low interest rate trap.

Either way, the new debt formats suggested will stabilise the finances of a nation, prevent bubbles and clear the way forward from a host of problems currently faced by central banks and policy-makers, not forgetting that PEOPLE and businesses will be safer.

For further detail read the later chapters of this book.

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