ISAs and Pensions

Interest only mortgages have been popular for many years.  In the 1970s, 1980s and 1990s many were sold with endowments as the repayment vehicle.  Until 5^th April 2000 Mortgage Interest Relief at Source (MIRAS) offered borrowers tax relief on their mortgage interest payments.  The relief was greater, over the mortgage term, for those with interest only payments.  In the distant past some forms of endowment also offered tax relief on the premium payments.

 

During the 2000s, with the withdrawal of MIRAS, and as interest rates fell, so too did the growth expectations of previously sold endowments.  Many endowments which have matured over the last few years have done so with a shortfall, leaving the mortgage borrower to make up the difference between the endowment proceeds and the mortgage amount. 

 

The loss of tax relief and the poor performance of endowments over recent years has made many people consider and opt for a capital repayment mortgage.  A capital repayment mortgage offers a guarantee of repayment at a certain date.  There is however no potential for repaying the mortgage early due to outperformance, as there is no investment vehicle.

 

New endowments are no longer readily available to buy but there are other investments which could be used to repay an interest only mortgage. 

 

Most lenders will accept the following as repayment vehicles.  New or existing ISA and unit trust investments, the lump sum available from a pension at retirement, the sale of a second home, downsizing your main residence, the sale of a business and existing endowments coming to maturity.  You could obviously use any money you wish to repay the mortgage, and many people will use inherited monies, but the lender will usually want to see a realistic plan utilising one of the recognised vehicles. 

 

As Independent Financial Advisers we are able to not only discuss your mortgage situation but we can also recommend the most suitable and appropriate investment vehicle. 

 

If you take out a mortgage of £100,000 and expect to repay it in 25 years, the costs you will have to bear in interest payments, assuming a rate of 5% are £416 per month.  To repay this mortgage using an ISA and assuming a 6% growth rate you should invest £182 per month.  The benefits of this are the flexibility of payments and the potential for repaying the mortgage early.  The downsides are the need to review the investment regularly (potentially increasing the monthly payments) and that there is no guarantee when your investment will reach £100,000.  One other benefit of having an ISA as the repayment vehicle is that if you wish to start investing in other property (e.g. buy to let), you can encash some of the ISA monies to place the deposit.  This is not so easy if you have a repayment mortgage.

 

Pensions can also be used to repay the mortgage and to help provide an income in retirement.  To achieve a lump sum of £100,000 you would need a £400,000 pension pot.  Over 25 years this would require a monthly investment of just under £600 for a basic rate taxpayer (less for a higher rate taxpayer).  In addition you would have a pension pot of £300,000 which for a single male aged 65 would allow him an income of £21,400 per year before tax.

 

The points raised above require further discussion with an Independent Financial Adviser (IFA) before you decide to opt for an interest only mortgage. 

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, adam@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin DipPFS

27^th July 2009

Lender Profiteering

Banks and Building societies are now operating with the highest profit margins on mortgages for as long as meaningful records have been kept.  Five year money-swap rates used by lenders to price their fixed rate deals have fallen to 3.45%.  Unfortunately they are charging up to 7.89% for five year fixed rate products if you have a 10% deposit. Even if you are able to raise a big deposit of around 30%, and by doing so significantly decrease the risk for the lender, rates can be still as high as 7.49%.

 

In the past lenders tended to make a profit of 0.8% per annum on fixed rates, so the above rates are a huge departure from the norm, with margins increasing significantly. In some cases the lender now only has to sell one mortgage to make the same profit that they would have done by selling five or more mortgages in the past.  They also have the added bonuses of needing less capital and employing fewer people to process the cases, while strict underwriting and low loan to value ratios keep risk down to an absolute minimum.

 

With only a few lenders operating in the market one would have thought that this type of business model, making arguably excessive profits, would have come to the attention of the government with their market practises.  One area for them to particularly focus on would be their recent practice of removing fixed rates almost en masse and replacing them with higher rates when in reality swap rates have actually fallen.  The government were very keen to investigate doorstep lenders but as yet have done nothing to curb mortgage lenders.  This may be because they own a high percentage of the High Street lenders themselves and are keen to recover the investments they made to rescue the Banks.  They are therefore prepared to tolerate such high rates.  I believe they are wrong in taking this approach as it would appear to be more politically advantageous to support the housing market as we head towards an election, rather than suppress it with high rates and restricted terms. Voters are more likely to respond positively to lower interest and long term fixed rates, which give people security and confidence to plan for the future, than they are to more quantative easing

 

The British economy relies upon the housing market to provide millions of jobs directly and indirectly. However, although I feel this reliance should change in the long term, for the moment I believe fairer mortgage rates would not only benefit the borrower but also the wider economy in terms of employment and personal consumption .This in turn would benefit the government with more taxes collected and less unemployment benefit paid. In addition there would not be the need for Nationwide Building society to lend 125% mortgages to their customers in negative equity, as its possible that prices, in a relatively short period of time, will return to previous levels. In fact, I find Nationwide’s approach to lending puzzling as they announced their negative equity deal this week, but are not prepared to lend more than 85% to new buyers.  Perhaps the answer to this puzzle is in the rate they will charge for the 125% loan.

 

If lenders persist with higher rates, consideration should be given to the idea of setting up a body to regulate rates which could ensure both savers and investors receive a fair deal in this restricted market.  Hopefully, a situation requiring regulatory action can be avoided, but perhaps the threat of this will do the trick.

 

Kieron Bassett Financial Services have two advisors who can assist and recommend the most appropriate product for you.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Kieron Bassett CertPFS

20^th July 2009

Exam Success

Adam Elkin, who has been with Kieron Bassett Financial Services since November 1999, has recently completed his studies towards the Diploma in Financial Services.

Adam is the first of the advisory team within the firm to achieve the Diploma.  He looks forward to eventually completing the Advanced Diploma and achieving Chartered Status.

The advanced qualifications which Adam, Jason and Kieron are undertaking show the firm’s willingness to strive for more professional standards.

Indications Of Recovery

Estate Agents are noting that agreed sales have doubled since the bottom of the housing market in 2008.  Sales over the most recent quarter have been at the level of 10 per month, against 5 per month last year.  This increase shows signs that there is an increased appetite for home ownership.

 

Buyers have been waiting for the economy to show signs of recovery before taking the leap to move or to buy their first home.  They now feel that the economy shows sufficient signs of stability, if not recovery, and as a result are stepping out into the market. 

 

I believe there is a pent-up demand for property as many people have put off a move over the last couple of years.  As this demand works its way through we could see signs of continued growth in house sales. 

 

The estate agents do feel that there is still a limiting factor which will not allow all prospective buyers to move home.  Mortgage approvals are still at very low levels and until this changes and lenders regain their appetite for lending house sales will be lower than the overall demand.

 

This means that those who are able to buy now will benefit from increases to the value of their home as mortgages become more available over the next few years.  As the gap between properties being put up for sale and the number of properties being sold narrows, prices generally increase as there are fewer properties available per buyer.  These are the principles of supply and demand. 

 

Of course, house price growth is not completely predictable and prices could continue to fall.  However, over the long-term prices tend to rise and if we believe the indicators, those buying a long-term investment now, would benefit more than those entering the market in the future.

 

For those of you who require a mortgage; a deposit or equity of 25% of the value of the property is the best way of securing the most competitive mortgage interest rates.  Variable rates start from between 3-3.5% and fixed rates are available from 4.5%.  Variable rates seem competitive over the short-term, but in my opinion fixed rates will give better value for money if you are buying a deal for three or more years, as rates look likely to rise over that period. 

 

If you require advice relating to home ownership or mortgages, or affiliated products, then you should consult an independent financial adviser (IFA) to discuss your individual circumstances.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, adam@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin DipPFS

13^th July 2009

Income Protection

It might have been the hyperinflation of Ruddles Best Bitter at Weatherspoons having gone up from 99p per pint to £1.59 per pint in a few weeks.  Or possibly the assertion in the companies magazine that if there were 1500 other Weatherspoon style chains in the country that such is the amount of tax that they would collect none of us would have to pay income tax.  But very soon after drinking the beer and reading the article last week I succumbed to an infection that I hasten to add was not alcohol related.  However perhaps these two thoughts of first how much an everyday beverage (although competitively priced) can increase by such an amount in such a short space of time.  Then secondly of how much as a nation we would have to drink if the government relied on alcohol as its main taxing device, did perhaps contribute to my queasiness.

 

It did however focus on two of the main enemies of sustainable growth, inflation and tax.  With Weatherspoons statement about how much tax we have to pay a sobering one.  Battling tax and inflation is not easy particularly when it has been disclosed that all our income tax is spent on paying out benefits.  I believe that whoever is in power in the next few years we are going to have to face higher tax rates and make larger public spending cuts to protect our credit rating as a nation.

 

This in my opinion will impact on the mortgage market as benefits are cut across the board.  I believe state funding that helps pay mortgages when people suffer sickness will be cut, and also public and private companies will reduce their sick benefits.  This will mean more self reliance with many mortgage customers not enjoying the safety net they had in the past.  I think this will lead to more people considering income protection as a method of ensuring that if illness does strike that they can maintain a roof over their heads.

 

Cover can be tailored to meet your needs.  If you can manage your mortgage and other bills for say 3 months because you always keep savings available to cope with emergencies or you get paid for 3 months, then cheaper premiums are available to you.  This is because you are prepared to defer you claim for 3 months.  The longer you defer your claim the cheaper the premiums with become.  None smokers with healthy lifestyles and low risk occupations tend to attract the lowest premiums for the risks involved.  There are a number of Friendly Societies that will take on high risk occupations such as construction workers, and they can offer day 1 cover at comparatively competitive premiums.  It is worth noting that income protection differs from mortgages payment protection in two ways firstly you can cover significantly more that your mortgage payments, and secondly if you become sick it will normally pay out to your retirement date or the end of your mortgage and not just 12 months.

 

Due to income protection being a plan that generally only gives you a return if you claim, many people see it as poor value as you get nothing back.  Or they read about the small percentage of claims that are not paid out normally due to none disclosure, and believe that they represent a higher percentage than that is actually the case.  Fortunately the majority of claims are paid out but are not highlighted as in my opinion they do not make such good news stories, so the product remains undervalued.  However it does concentrate the mind when your lying in your bed at home feeling like death and running a high temperature.  If you have cover its one less thing to worry about.  If you don’t you may end up dragging yourself back to work earlier than you would have done and compounding your health problems.

 

Personally speaking I have had cover for 20 years and I have never made a claim, and I won’t be doing so this time as my contract only pays out after 3 month sickness and I expect to be back at work in a few days.  As mentioned earlier some people would say the cover I have is a total waste of money as I have never claimed.  But I am happy with the cover as I view it as a good security blanket, and I believe to leave it to chance by not maintaining this valuable cover could be viewed as being financially irresponsible.