After the debacle of the pension scandal in the mid 90s and the continuous under performing personal pension plans many in UK turned and are still turning to properties as an investment for their retirement. The housing market has certainly not failed them as it relentlessly continues to grow. But I question how much of this benefit is being lost to the mortgage lender?:
A study of the mortgages being taken out on Buy to Let properties will show that it is mainly of the Interest Only type with no investment plan to pay the loan at the term end. The assumption is that the value of the property will never stop to grow and at term end it will be sold and the net proceeds after repaying the mortgage - the original amount- will then be a lump sum to be used towards retirement. Hold on! that is not quite right. I forgot to subtract the Capital Gains Tax from the sale proceeds too before it can be had towards a pension.
What would have been the final outcome if the mortgage had been of the Capital Repayment type? There would have been no more mortgage to repay at term end and instead of selling off the property and pay Capital Gains Tax the home owner would continue to let out the property and earn an income as a pension assuming term end is at retirement. In other words he would be more in control and with more choices at term end.
But why dont Buy to Let owners use this type of mortgage instead? The reason is finance:
The following example will demonstrate the reason why.
Lets take a 25year loan for a £180,000 Property with £135,000 mortgage at 5.25%, monthly payment on Interest Only would be £591 against a rental income of £700.
Thus such investment would be self financing.
However had the mortgage been of the Capital Repayment type the monthly payment would be £809 against a £700 rental income rendering the investment not self financing.
Thus here is the reason for sticking to an Interest only mortgage with the winner being: The mortgage lender who would have received interest paid on the whole amount throughout and at term end be paid the original amount.
Could there be a solution to such a time bomb? Yes, if only the interest could be around 2% because then the capital repayment monthly payment would be £572 i.e. even cheaper than the above Interest Only monthly payment, and lower than the rental income. It would render the safer Capital Repayment method self financing too but is there such a mortgage rate?
Yes and enquire here for a safer landing at pension time.
Louis d'Espagnac
Chief Executive
Friday, March 30, 2007
Friday, March 16, 2007
Personal Debt
Is there a solution left to address rising personal debt in Britain and avoid folks going bankrupt
After so many years in financial services I have noted that certain types of business come all at the same time. For instance a couple of years ago we had 10 divorcees remortgaging in order to meet their divorce settlement. They all came in a normal working week. Another time it was the turn of First Time Buyers to flock in virtually all at the same time. On neither occasion had we advertised or run a marketing programme for such groups. But it was all good and pleassant business.
In the past ten days however we have been flooded with requests from people sinking under the burden of debt and falling in arrears with their payments. As it happens this coincided with an announcement by The Royal Bank of Scotland that they had noticed a great number of their credit card clients falling behind on their payments too. Is this the begining we have been dreading or is it just another bleep? I do not know the answers to these questions but I do know that there is a common theme among those all who have come to us to be saved from calamity - their trouble started after falling sick or being temporarily out of work at one time or another. None had any Mortgage Payment Protection Insurance also known as Accident, Sickness and Unemployment.
There may be a number of reasons why they did not have such insurance in the first place but lets hope it was not because their broker at the time could not be bothered to recommend such product because the commission earned was too menial.
Had the fitter in Liverpool or the IT manager paid such policy they would have had their mortgage paid for at least a year whilst they were sick and out of work respectively. Instead they now have to find a drastic solution to the threat of eviction from their respective lender.
At The Mortgage Explorer we propose to all our mortgage clients a protection plan which if affordable will consist of:
a.Life Cover which will pay the mortgage off through a lump sum in the event of death. This will commence at the Exchange of Contracts in case of purchase or upon completion of a remortgage.
b.Critical Illness Cover which will pay the mortgage off through a lump sum in the event of incurring a specified critical illness. Date of commencement same as the life cover.
c.Mortage Payment Premium Payment or Accident Sickness Unemployment with a minimum deferred period and paying out for at least a year.
d.Private Medical Care which can help in expediting recovery through not having to be on a waiting list. It may be helpful to have paid off the mortgage through the critical illness plan but in addition it will be even better if one can expect quicker treatment through a Private Medical Care policy. This plan would commence at the same time as the life cover plan.
e.Income Protection Plan which will replace a proportion of the income in the event of illness. This payment can last till retirement and can complement the Accident Sickness and Unemployment Plan in so far as the Income Protection plan deferred period would be for a year. The reason being that premiums of such plan can be minimised by having a longer deferred period.
There is a school of thought that would prefer to use solely an Income Protection plan with a very short deferred period say a week instead of using an Accident Sickness and Unemployment plan but cost may be prohibitive and in addition Income Protection do not cover unemployment. The good broker will have worked out the proper combination for the applicant.
These plans cost money but they go a long way in protecting your largest single purchase from being repossessed.
After so many years in financial services I have noted that certain types of business come all at the same time. For instance a couple of years ago we had 10 divorcees remortgaging in order to meet their divorce settlement. They all came in a normal working week. Another time it was the turn of First Time Buyers to flock in virtually all at the same time. On neither occasion had we advertised or run a marketing programme for such groups. But it was all good and pleassant business.
In the past ten days however we have been flooded with requests from people sinking under the burden of debt and falling in arrears with their payments. As it happens this coincided with an announcement by The Royal Bank of Scotland that they had noticed a great number of their credit card clients falling behind on their payments too. Is this the begining we have been dreading or is it just another bleep? I do not know the answers to these questions but I do know that there is a common theme among those all who have come to us to be saved from calamity - their trouble started after falling sick or being temporarily out of work at one time or another. None had any Mortgage Payment Protection Insurance also known as Accident, Sickness and Unemployment.
There may be a number of reasons why they did not have such insurance in the first place but lets hope it was not because their broker at the time could not be bothered to recommend such product because the commission earned was too menial.
Had the fitter in Liverpool or the IT manager paid such policy they would have had their mortgage paid for at least a year whilst they were sick and out of work respectively. Instead they now have to find a drastic solution to the threat of eviction from their respective lender.
At The Mortgage Explorer we propose to all our mortgage clients a protection plan which if affordable will consist of:
a.Life Cover which will pay the mortgage off through a lump sum in the event of death. This will commence at the Exchange of Contracts in case of purchase or upon completion of a remortgage.
b.Critical Illness Cover which will pay the mortgage off through a lump sum in the event of incurring a specified critical illness. Date of commencement same as the life cover.
c.Mortage Payment Premium Payment or Accident Sickness Unemployment with a minimum deferred period and paying out for at least a year.
d.Private Medical Care which can help in expediting recovery through not having to be on a waiting list. It may be helpful to have paid off the mortgage through the critical illness plan but in addition it will be even better if one can expect quicker treatment through a Private Medical Care policy. This plan would commence at the same time as the life cover plan.
e.Income Protection Plan which will replace a proportion of the income in the event of illness. This payment can last till retirement and can complement the Accident Sickness and Unemployment Plan in so far as the Income Protection plan deferred period would be for a year. The reason being that premiums of such plan can be minimised by having a longer deferred period.
There is a school of thought that would prefer to use solely an Income Protection plan with a very short deferred period say a week instead of using an Accident Sickness and Unemployment plan but cost may be prohibitive and in addition Income Protection do not cover unemployment. The good broker will have worked out the proper combination for the applicant.
These plans cost money but they go a long way in protecting your largest single purchase from being repossessed.
Set your sights to finish early
Paying a mortgage off early can result in savings of tens of thousands of pounds. But the trick is finding a lender that will let you do so without too many penalties.
Last summer a friend of mine demonstrated to an audience a device that saves energy.He did this by flicking on an ordinary cigarette lighter and inviting me to join him on stage.
I had to place the palm of my hand above the flame at a height where I could not feel the heat of the flame.
He next strapped two small Ecoflow magnets round the metal part of the lighter and in a flash I realised that I had to move my hand away as the heat grew.
To the delight of the audience, my friend explained that this was not magic but instead the properties of the magnets caused the same amount of fuel to burn more efficiently. He claimed that such a device could save the average consumer some 20% on the fuel bill.
I put it to the test and, amazingly, my gas bill has gone down and it also gave me an exciting idea.
As an Independent Financial Adviser, I am forever seeking means to obtain for my clients and myself the best value for our money.
The experiment described above made me ponder on other ways to reduce the cost of running my home.
Like the majority of people, my largest individual outgoing had to be the mortgage. I decided to investigate ways to reduce it and am pleased to say that I am succeeding. I am at present on course to pay off a 20 year £56,000 mortgage in 7 years and 10 months - thus saving myself £38,669 on an interest payments.
You see, I believe in the power of focusing and having turned the idea of paying off my mortgage early into an obsession. I was delighted to find a solution while on vacation in the USA.
The principle is simple: See your mortgage as an overdraft - a liability that you want to get rid of quickly.
The difficult part is to find a lender who will provide you with the opportunity to pay off your mortgage this way.
Having experienced the benefit myself, I felt confident that I could offer this plan to my clients who, provided they stuck to the projection set on the outset, would save themselves thousand of pounds. For example, one of my clients, a young Hampshire couple hope to save £45,519 of interest on a 21 year term £33,000 endowment mortgage by paying it off in seven years 10 months.
Another couple in Poole who now have a £65,000 endowment mortgage project and plan to pay it off in just under 15 years with a saving of £35,000 plus the whole maturity value of the endowment.
I am not in the business of clairvoyance but am prepared to bet that in the very near future, everybody will want one of these mortgages.
Besides saving on interest paid, it will go a long way to meeting the consequences of your endowment not reaching its projected value at maturity.
Last summer a friend of mine demonstrated to an audience a device that saves energy.He did this by flicking on an ordinary cigarette lighter and inviting me to join him on stage.
I had to place the palm of my hand above the flame at a height where I could not feel the heat of the flame.
He next strapped two small Ecoflow magnets round the metal part of the lighter and in a flash I realised that I had to move my hand away as the heat grew.
To the delight of the audience, my friend explained that this was not magic but instead the properties of the magnets caused the same amount of fuel to burn more efficiently. He claimed that such a device could save the average consumer some 20% on the fuel bill.
I put it to the test and, amazingly, my gas bill has gone down and it also gave me an exciting idea.
As an Independent Financial Adviser, I am forever seeking means to obtain for my clients and myself the best value for our money.
The experiment described above made me ponder on other ways to reduce the cost of running my home.
Like the majority of people, my largest individual outgoing had to be the mortgage. I decided to investigate ways to reduce it and am pleased to say that I am succeeding. I am at present on course to pay off a 20 year £56,000 mortgage in 7 years and 10 months - thus saving myself £38,669 on an interest payments.
You see, I believe in the power of focusing and having turned the idea of paying off my mortgage early into an obsession. I was delighted to find a solution while on vacation in the USA.
The principle is simple: See your mortgage as an overdraft - a liability that you want to get rid of quickly.
The difficult part is to find a lender who will provide you with the opportunity to pay off your mortgage this way.
Having experienced the benefit myself, I felt confident that I could offer this plan to my clients who, provided they stuck to the projection set on the outset, would save themselves thousand of pounds. For example, one of my clients, a young Hampshire couple hope to save £45,519 of interest on a 21 year term £33,000 endowment mortgage by paying it off in seven years 10 months.
Another couple in Poole who now have a £65,000 endowment mortgage project and plan to pay it off in just under 15 years with a saving of £35,000 plus the whole maturity value of the endowment.
I am not in the business of clairvoyance but am prepared to bet that in the very near future, everybody will want one of these mortgages.
Besides saving on interest paid, it will go a long way to meeting the consequences of your endowment not reaching its projected value at maturity.
Flexible Mortgages
The Mortgage of the Millennium
Borrowers circumstances can change much more rapidly and dramatically nowadays than was the case a few years ago. Few people can claim to have a job for life, and the divorce rate is higher. There is therefore a growing demand for more flexibility in mortgages and many lenders are at long last offering loans with many more options than before.The new flexible mortgages come under various brand names but are often still referred to as the Aussie mortgage. This is technically incorrect as the method was originally invented by a Canadian maths professor over 20 years ago where it accounts for nearly 90% of all mortgages. It is also widely adopted by householders in Australia and USA.
These mortgages are fast becoming the most popular in the market as they offer the borrower the opportunity of controlling his mortgage by adopting one of or all of the following options:
Borrowers circumstances can change much more rapidly and dramatically nowadays than was the case a few years ago. Few people can claim to have a job for life, and the divorce rate is higher. There is therefore a growing demand for more flexibility in mortgages and many lenders are at long last offering loans with many more options than before.The new flexible mortgages come under various brand names but are often still referred to as the Aussie mortgage. This is technically incorrect as the method was originally invented by a Canadian maths professor over 20 years ago where it accounts for nearly 90% of all mortgages. It is also widely adopted by householders in Australia and USA.
These mortgages are fast becoming the most popular in the market as they offer the borrower the opportunity of controlling his mortgage by adopting one of or all of the following options:
- Ability to pay more or less than the agreed monthly amount without penalty
- Ability to make lump sum payments
- Taking payment holidays for one or two months or if circumstances are difficult
Overpayments at anytime allow clients to reduce the term of their mortgage if they have a repayment mortgage. In the case of an endowment or similar investment vehicle where the term is fixed, it has the benefit of reducing the capital balance and thus producing a lump sum cash surplus on maturity.
Many flexible mortgages also calculate interest on a daily basis rather than monthly or annually which in itself will save significant amounts over the term as any capital paid off is credited to the account immediately and interest calculated on the reduced balance. Lenders who still use the annual rest method of calculation usually only reduce the capital balance once a year despite regular monthly payments having been made.
Flexible mortgages are available as both a straight loan or as a current account mortgage (CAM) where the borrower has the option of having a chequebook and credit card but has to bank with the lender. The latter can be of great benefit to the self-employed as a financial planning tool as their tax and VAT can be saved in their account until payment is due.
This has the dual advantage of:
Reducing the capital balance, be it temporarily, and therefore the amount of interest payable on the outstanding loan
Saving interest on a loan at a higher rate than can generally be obtained by short term investment gives a better return on your money
Also of particular interest to borrowers wishing to raise capital for various reasons, some lenders will use the equity in a property as an additional draw down facility and, subject to status, allow loans of 90% or more even though your mortgage may only represent 50% of the house value.
Finally many lenders now offer incentives such as short term discount rates linked to lower variable rates, free valuation, no higher lending fee (Mortgage Indemnity Guarantee), no redemption penalties for early repayment and free convincing costs.
This market, being relatively new to the majority of homeowners, can still present a formidable maze and many of the so-called flexible mortgages available arent as flexible they first appear. However, there are some superb deals available and an independent mortgage broker will be aware of the good and not so good.
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