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Pros & cons of turning your home into a cash machine

Archive for October, 2017

Pros & cons of turning your home into a cash machine

Thursday, October 26th, 2017

Recent figures have suggested that over 17,500 older homeowners took out equity release plans on their homes during the first six months of 2017, marking an increase of 44% compared with 2016. Equity release plans, also referred to as ‘lifetime mortgages’, allow homeowners aged over 55 to access their home’s equity without the requirement to make repayments each month. Instead, the interest is allowed to accumulate in the background and is only paid off when the house is sold either due to the homeowner’s death or a move into a care home.

UK homeowners in their 60s and 70s have now used equity release plans to release a combined total of £1.25 billion. Information from Key Retirement, a firm specialising in equity release, suggests that the most common uses for the cash received are covering the cost of home improvements, clearing debt, boosting money available to cover everyday costs, paying for holidays and helping children and grandchildren with the purchase of their first home.

The rising popularity of equity release plans is as a result of several factors. Firstly, as the average life expectancy increases, people need a larger amount of money to pay for their retirement years. The second reason is the growing value of homes in the UK. Figures from Halifax suggest that over the past twenty years, the average UK house has seen its value rise by 236%. For many people, their home is likely to hold the largest portion of their wealth.

However, accessing money in this way can be expensive, with the Equity Release Council reporting an average of 5.3% interest charged on equity release plans. The average amount taken by homeowners through these schemes is £70,000. Someone taking this amount at the average interest rate when they were 65 would end up owing £280,000 if they reached their 93rd birthday.

As equity release mortgages have no end date, the figure continues to rise the longer you live or remain in your home. Many take them out hoping that the value of their property will rise at a faster pace than the interest accrued, but there is no guarantee of this happening. Other potential problems from taking an equity release mortgage include eroding the amount you leave as inheritance, and possible restrictions on being able to move house should you want to in the future. So, whilst an equity release plan might be the best option for some, anyone considering taking out such a mortgage on their home should seek professional financial advice and consider all options available to them before going ahead.

Most households struggle after 7 months if a mother can’t work

Thursday, October 26th, 2017

Recent research carried out by Scottish Widows has found that three quarters of UK households would only manage to cover their bills for seven months if the income of the woman in the family was lost through death or illness. In addition to the financial ramifications, women spend almost an entire day (23 hours) each week carrying out household chores and caring for children, which the family would struggle to carry out or pay for were she no longer there to do these vital tasks.

Despite these statistics, Scottish Widows discovered that less than a third (31%) of women in the UK have a life insurance policy, with less than one in ten (7%) holding a critical illness policy. The most popular reason for women not taking out such cover is them not seeing it as a financial priority or simply not believing that it was needed. More worryingly, over half (54%) of the women surveyed did not have a will in place.

The survey also asked what would happen should a partner find themselves out of work for six months, with a quarter of respondents stating they would have to rely on state benefits to cover household expenses. 68% of the women surveyed admitted to not being able to save for the long-term future due to the need to pay for other things.

“One of the most important things a woman can give her family is security, but financial protection is still too far down the priority list because women simply don’t recognise their own value,” said Scottish Widows’ protection director Jackie Leiper. “It’s crucial that everyone – no matter what stage of life they’re at – considers whether they have the right protection in place to ensure their loved ones aren’t left coping with financial strain on top of emotional trauma if the worst were to happen.” Reacting to the findings of the research, Ms. Leiper also emphasised the “need to recognise the monetary value of women’s time and effort in the household, and to safeguard it accordingly.”

Interest rate rise and the impact on mortgage bills?

Wednesday, October 18th, 2017

Recent official figures have revealed that homebuyers are being lent more money by banks than at any time since the global financial crisis a decade ago, with many of the borrowers being young people for whom stepping onto the property ladder is barely affordable. As such, billions of pounds of debt which may prove unsafe is being taken on by them at a time when interest rates are expected to rise.

Someone putting down either a 5% or 10% deposit on a property in order to borrow a minimum of 3.5 times their salary (or 2.75 times their combined income for couples) falls into this category. For example, someone earning £30,000 a year and buying a house worth £116,000 with a £105,000 mortgage would be part of this group, as would a couple earning £50,000 a year between them and holding a mortgage of £137,500 on a property bought for £152,000.

During the first three months of 2010, loans to people falling into this category reached a combined total of £279 million. In the three months to July 2017, that figure had risen to £2.2 billion. This marks a huge increase of 670% in just over seven years, with the total doubling in only the last two years.

The situation has been driven by house prices rising much faster than the salaries of first-time buyers, forcing many of them to take on increasingly large amounts of debt in order to own their own home. However, the indication by the Governor of the Bank of England, Mark Carney, that interest rates could be set to rise within the next two months, could result in these big borrowers struggling to manage their debt. At least ten lenders, including Nationwide and Halifax, increased their rates at the start of October in anticipation of a rise in the Bank Rate.

Even a small rate increase could add hundreds of pounds to the mortgage payments of those with the heftiest variable-rate mortgages. A rise from the current rate of 0.25% to 0.5% would result in a homeowner with a £150,000 mortgage experiencing an average yearly increase on their repayments of £259. Many are predicting further increases in the future, however, with a second rise to 0.75% before the end of 2017, which would bump the average mortgage bill up by £520 annually. Some economists are expecting rates to go up to 2.25% in the next two years, which would result in mortgage repayments going up by £1,056 a year.

What will the new Finance Bill contain?

Wednesday, October 18th, 2017

A second draft of the Finance Bill 2017 was introduced in September following the first draft released earlier in the year. The government used this second version to reintroduce measures that had been taken out of the earlier, shorter draft following Theresa May’s decision to call a snap election.

The new draft includes new penalties for those who allow the use of tax avoidance schemes which are subsequently defeated by HMRC, and changes to prevent artificial schemes being used by individuals to avoid paying the tax owed on their income. The rules surrounding company interest expenses have also been updated to ensure excessive interest payments can’t be used by big businesses to reduce their tax payments.

The new Bill ensures that people who have lived in the UK for many years pay tax to HMRC in the same way as UK residents through the abolition of permanent non-dom status. The dividend allowance has also been reduced from £5,000 to £2,000 effective from April 2018, a move which will bring the tax treatment of people working through their own company and those who are self-employed or employees further in line with each other. The Money Purchase Annual Allowance has also been lowered from £10,000 to £4,000 in order to limit an individual’s ability to recycle pension savings in order to receive additional tax relief.

As these are all measures which were dropped from the Finance Bill before the election in June, the Finance Bill is unlikely to have held any surprises for many people. The only measures which have been dropped are two clauses on Customs enforcement powers and a third on landfill tax. It is expected that the third Finance Bill of 2017, due in December, will contain significant landfill tax proposals following announcements made in September. Also of note in the Bill are clauses looking ahead to Making Tax Digital, with digital tax returns currently likely to become mandatory from 2020.

4 key takeaways from the Tory party conference

Wednesday, October 11th, 2017

Whilst many in the media are going to be focusing on that speech, including the cough, the poorly-affixed letters and the moment Theresa May was interrupted to be handed a fake P45, there are plenty of other issues coming out of the Conservative Party Conference this month. Let’s have a look at four of the key financial announcements.

  1. Tuition fees – The maximum amount universities can charge annually for tuition fees was initially set to increase by £250 to £9,500. However, Mrs. May indicated in her speech that she had listened to the concerns of voters and as such had decided to instead freeze fees at the current limit of £9,250. Perhaps more significantly, the Prime Minister also indicated that the amount graduates would need to earn before starting to repay their loan would be increased from £21,000 to £25,000. She also pledged to review the entire student finance system, refusing to rule out the introduction of a graduate tax to take the place of tuition fees in the future.
  2. The Help to Buy scheme – If the reversal of policy on tuition fees suggests that the Conservatives are targeting younger voters then the announcement of the extension of the Help to Buy scheme all but confirms it. Speaking on the Andrew Marr Show, the Prime Minister promised to find an additional £10 billion to put in to the scheme, which will allow a further 135,000 young people to purchase their first home. Those benefitting from the scheme will be able to take out a mortgage on a newly built property with only a 5% deposit. Mrs. May gave few details, saying that these would be outlined in November’s Budget.
  3. Energy prices – Describing the energy market as “broken”, Theresa May promised to end “rip-off” bills from the big six energy providers by placing a limit on the amount they are allowed to charge for gas and electricity. However, the move has already been criticised, with suggestions that capping prices might in fact make matters worse for consumers by reducing competition between providers, leading to fewer people switching in order to get the best deal.
  4. Brexit – Following her speech in Florence during the second half of September, in which she indicated there would be a transitional “status quo” period of two years following Britain’s exit from the EU in 2019 and that the country would indeed be paying its “fair share of the costs”, the Prime Minister spent little time speaking about Brexit at the conference. But that didn’t stop others such as foreign secretary Boris Johnson and Chancellor Philip Hammond from doing so, with their contrasting speeches suggesting that the division within the Conservative party over what Brexit should look like is as clear and present as ever.

Too late to start saving?

Wednesday, October 11th, 2017

Not beginning to save towards your retirement until you reach your fifties would not so long ago have been considered leaving matters far too late to put anything meaningful away for your life after work. Previous generations saw building a pension as something to do over an entire career, with contributions throughout your working life coupled with investment growth being the only way to ensure your retirement pot was substantial enough to provide for you throughout your retirement.

However, whilst compound interest still means that anything put away at the start of your career will see some serious growth by the time you need it much later in your life, the reality today for many young people is that they simply have very little to invest when they first begin work. Many may find that they won’t be able to begin saving seriously until they reach middle age.

The reasons for this are several. First of all, your wages are statistically likely to reach their peak for women during their forties and for men in their fifties. Secondly, as the average mortgage term is twenty-five years, most people who bought their home in their twenties are likely to have finished paying it off by the time they reach their fifties. A third key reason is the declining cost of raising children. Whilst it’s unlikely that you’ll stop giving them financial support completely, if you’ve had kids in your twenties or thirties it’s probable that the cost of providing for them will have gone down a great deal by the time you’re heading towards 50.

With considerable tax relief on both ISA investments and pensions, it’s now possible to build a healthy retirement fund even if you only start saving in your fifties. For example, someone with no existing savings, earning £70,000 annually, who started saving the maximum permitted yearly amount of £40,000 at age 50 could amass a pension pot of £985,800 by the time they turn 67, assuming a 4% annual return after charges.

£40,000 a year might sound like a huge amount to save every year, but this amount includes the generous tax relief enjoyed by pension savings. Our £70,000 earner would only need to put away £27,000 of their own money in order to reach the £40,000 contribution, whilst a basic rate taxpayer would need to contribute £32,000 to achieve the same.

So, whilst it’s sensible to begin saving as early as you can, it is possible to begin putting money away when you reach middle age and ensure you have enough to provide for yourself later in life. The last ten years of your working life can reasonably be seen as some of the most important in terms of preparing for your retirement.

October market commentary

Wednesday, October 4th, 2017

Well, we’re still here. Despite the seemingly best efforts of the leaders of the United States and North Korea – the world is still turning. But September was a month of ‘another day, another North Korean rocket flying over Japan’ and it ended with Kim Jong-un threatening to explode a nuclear bomb over the Pacific. Small wonder that South Korea is creating a special military unit with only one aim, which does not bode well for Kim.

Meanwhile, central bankers have warned that, well… they seem to have lost $13tn. The Bank for International Settlements has warned that this amount may be missing from global balance sheets because, apparently, international standards do not require such a trifling sum to be included. The authors of the report say that the debt ‘remains obscured from view’ – which rather makes $13tn sound like your TV remote.

Throw in the devastating effects of Hurricanes Harvey, Irma and Jose and September was a month where it was difficult to find any good news. At least with it being Party conference season there may be some positive policies announced: although it could be said the Prime Minister is clinging to a life raft with the sharks circling, as she makes her major speech.

September saw the Labour Party getting together in Brighton, which could either be viewed as a triumph for Jeremy Corbyn and his ‘government in waiting’ as they outlined a clear vision for a stronger, fairer Britain or a party that would bankrupt the country within three months of taking office, depending on your view.

Meanwhile, the Conservatives are in Manchester, as Theresa May seeks to re-assert her authority following the disastrous General Election campaign. Having spent virtually all the election campaign deriding Labour’s ‘magic money tree’ Theresa May seems to have, well, magically found one at the bottom of her garden. Student loans, Help to Buy, lifting the public sector pay cap, £1bn to keep the Democratic Unionists onside… Philip Hammond’s Autumn Budget – now scheduled for 22nd November – is certainly going to be interesting.

Away from the Westminster plans and plots, the month started well as figures for August showed that UK manufacturing had hit a four month high, and later in the month it was reported that it had moved up one place in the ‘league table’ to become the 8th largest in the world. Unfortunately, the service sector couldn’t match this progress as the August figures recorded the slowest growth for 11 months.

Nevertheless, UK unemployment continues to fall – it is now down to 4.3%, down from 4.4% in the previous quarter and the lowest level since 1975. However, wages continue to stagnate, and with inflation hitting 2.9% many people are still seeing a fall in real wages.

What of interest rates? The month started with a suggestion from the Bank of England that there would be no rises for ‘at least a year:’ however by the end of the month Governor Mark Carney was expecting a rate rise “in the near term” – which could apparently be as early as November.

…And there was more gloom to end the month as credit ratings agency, Moody’s, downgraded the UK’s credit rating from Aa1 to Aa2, following earlier downgrades by the other major agencies. UK growth for the second quarter of the year was also revised down to 1.5% from an earlier 1.7%.

How did all this translate to the stock market? The FTSE 100 index of leading shares was down just 1% in September, opening the month at 7,431 and closing at 7,373.

News for the Brexit part of the commentary this month wasn’t hard to come by. ‘Michel Barnier vows to ‘educate’ UK over consequences of leaving’: ‘May has accepted a £50bn exit bill’: ‘Europe to block Brexit trade talks until December’: ‘May goes to Canada to seek trade deal’… And so it goes on: but as in previous months, the end result seems to be very little progress, despite Theresa May’s speech in Florence.

It was thought that progress might well speed up after the German elections but as you will read below, these have been anything but decisive, and Angela Merkel will have plenty of domestic issues to consider before she thinks about Brexit.

In the same way that the Labour Party are now apparently ‘war-gaming’ a run on the pound should they come to power, so the Government are supposedly doing the same with the prospect of ‘no deal’ by March 2019. It is looking increasingly likely…

The big news in Europe was the German elections, held on the last Sunday in September. They were largely seen as rubber-stamping another four years as Chancellor for Angela Merkel: four more years with ‘Mutti’ leading Germany and – by extension – Europe.

In the event, the Christian Democrat vote was down nearly 10% to 32.9%: the Social Democrats recorded their worst result since the war, with just 20.5% of the vote, and in third – with 12.9% of the vote – was the right-wing anti-immigration party, Alternative fur Deutschland (AfD).

Where did that leave Merkel? Substantially weaker: the Social Democrats have gone into opposition to lick their wounds, and Merkel is likely to be left with what is scathingly referred to as ‘the Jamaica Coalition.’ Based on the colours of the respective parties, this is a coalition between the Christian Democrats, the Free Democrats (roughly equivalent to the Liberals in the UK) and the Green Party.

Will it work? There could be months of wrangling, with Greens leader Katrin Goring-Eckardt saying in a TV debate, “Naturally there’s a lot that divides us. I’m not sure that we will succeed.” Does this leave a vacancy for a new de facto leader of Europe? French President Emmanuel Macron certainly seems to think so…

Despite this uncertainty, there was good news as the ECB predicted the fastest Eurozone growth since 2007, forecasting economic growth of 2.2% for this year It’s unlikely this figure will be repeated at Ryanair as the company pulled off one of the biggest PR disasters of recent times, cancelling any number of flights thanks to not organising their pilots’ holidays properly. The bill won’t reach the $30bn that the emissions scandal has supposedly cost Volkswagen but you suspect that the company will take a long, long time to recover.

At least, there were no shades of Ryanair for Europe’s leading stock markets: the German DAX index closed September up 6% at 12,829 and the French market jogged happily along in its wake, rising 5% to finish at 5,330.

The damage done to the Caribbean and the southern states in the US by the recent hurricane season has been well-documented. One estimate now puts the repair bill in Texas at $180bn following Hurricane Harvey.

It seems heartless to turn from that to Facebook’s cash mountain – but I am duty bound to report that the company’s revenues and profits soared in the second quarter, with more than 2bn people now logging into the site each month. The firm’s revenues hit $9.3bn for the April to June period, up 45% year-on-year, as profits for the quarter rose to $3.9bn.

It was mixed news for Apple, as they suffered a ‘major data breach’ ahead of the launch of the iPhone X, but then unveiled a phone that was seen as a major leap forward and ‘the future of the mobile phone.’ Or in many cases, the future of parents asking their children for help…

Worryingly, Toys-R-Us filed for bankruptcy protection: with an increasing number of malls threatened with closure over the next five years, you have to ask if this is a straw in the wind – and whether Amazon and other online retailers will now do to out of town shopping what they have done to so many high streets in the US and the UK.

The Dow Jones Index chose to side with Facebook rather than Toys-R-Us, and it rose 2% in September to end the month at 22,405.

Far East
There were two significant events in the Far East in September. In Japan, Prime Minister Shinzo Abe called a snap general election, looking to take advantage of opposition disarray and seeking support for his hard line against North Korea. Abe said the election would be a judgement on his spending plans and his handling of the Korean crisis. The election is due to be held on 22nd October and at the moment Abe and his Liberal Democratic Party have a comfortable lead in the polls. Then again we have seen other leaders with healthy poll leads call snap general elections…

We have written previously in this commentary about China’s mounting debt and credit problems, and in September credit ratings agency, Standard & Poor’s, cut China’s rating by one point from AA- to A+. This was down to worries about the build-up of debt in the country and puts China on the same level as Ireland and Chile.

The downgrade comes just a month before the Communist Party Congress, which is held only twice every decade and sets economic policy for the next five years: at the moment the Chinese Government has a target of 6.5% growth for this year.

Other than that, the rulers in Beijing were in the mood for banning things: bike sharing apps have now been banned in Beijing thanks to traffic chaos and safety concerns, and the government is also planning a ban on both petrol and diesel cars ‘in the near future’ as China looks to curb pollution and boost its electric cars industry.

Boosted by the likely return to power of Shinzo Abe, the Japanese market led the way in the Far East, rising 4% in the month to 20,356. The South Korean market was also up, albeit by only 1% to 2,394, while China’s Shanghai Composite Index was virtually unchanged at 3,349. The Hong Kong market fell back by 1% to end the month at 27,554.

Emerging Markets
One of the interesting things about writing this commentary is how a story which seemed crucial at the beginning of the month has been almost completely forgotten about by the end of the month. So it was in Emerging Markets, as September started with the BRICS summit – a meeting of the leaders of Brazil, Russia, India, China and South Africa. Chinese leader Xi Jinping told the delegates that an ‘open world economy’ was needed, with ever-increasing trade liberalisation. He told delegates that, “The development of emerging markets and developing countries won’t touch anyone’s cheese, but instead will diligently grow the world economic pie.” With China committed to massive investment in Pakistan you suspect that China and India may be squabbling over rather more important matters than pie and cheese in the long term…

Away from the kitchen and on the stock markets it was a good month for the Brazilian market, which was up another 5% to 74,294. The Russian index also did well as it attempts to regain some of the ground lost earlier in the year: it was up 3% in September to finish at 2,077. Not such a good month for the Indian market though, which closed down 1% at 31,284.

After an excellent year for the ‘And finally’ section of this report, September was a disappointing month. No-one accidentally locked himself in a cash machine, no Chinese toilets demanded facial recognition before they’d dispense loo roll and – only just back from holiday – there was no need for the new leader of Europe to spend thousands on make-up.

But there was an encouraging story from the world of technology, where the winner of the UK’s James Dyson Prize for Innovation was engineering graduate Ryan Yasin and his concept of ‘clothes that grow with your children.’ This is fantastic news for hard-pressed parents – and not just parents of toddlers. September is the month when many teenagers start university: they face the harsh reality of student loans and their parents face the equally harsh reality of ‘kitting them out’ with pots and pans and possibly even a textbook or two.

But at least new clothes won’t be an issue if Mr Yasin’s prototype clothes go into production. Freshers’ Week should be something to behold as everyone wanders round in their Thomas the Tank Engine tops and Mr Tickle trousers…