Archive for November 2005


Bridging Finance

November 15th, 2005 — 4:21pm

Bridging Finance allows you to buy another property BEFORE you have sold your own property. The amount of finance involved will be:
a) the amount of your existing mortgage PLUS
b) the cost of the new property.

This type of finance is very expensive. Putting it another way, the interest rates are sometimes similar to the rates people pay on credit cards but the loans are much much bigger. Some Bridging Finance lenders will also insist on a minimum 3 month term for the loan.

There will be an Arrangement Fee which will be a minimum of 1% of the finance involved and I heard of a case where Barclays Bank charged a 4% Arrangement Fee. The lenders legal fees need to be paid as well.

The interest will need to be paid each month as it is not usually possible to “roll-up” the accruing interest.

The maximum amount you can borrow varies from 60 to 75 per cent of the total value of both properties.

If you need to get building or conversion works done on the new property where delays are quite common &/or there are delays in selling your existing property, the total cost of this can roll up into enormous amounts. Interestingly, most of the enquiries I have had for this have come at a time when the clients either want to start a family or need extra space for a growing one. The extra stress can be considerable – especially if the wife is pregnant which is often the case here too.

The risk of having to pay credit card rates for what may be months, often puts people off moving and this has a knock-on effect on couples’ other plans.

There are two main types of Bridging Finance and the most suitable mainly depends on the time involved.

1) Standard Bridging Finance as above. If the finance period is less than three months, then this may be the “cheapest”.
2) Rolling Bridge Finance may be more appropriate (and much cheaper) if the borrowing period is going to be more than 3 months.
The fees for this will be in the order of:
a) 1% Arrangement Fee – but you would have to pay that anyway with Bridging Finance
b) 1% on top of the lender’s Standard Variable Rate so the payable rate should be about 7.5% per annum
c) 1% Exit Fee when the loan is repaid and if it has not been repaid after 12 months it can be extended.
d) The amount of borrowing left after everything has been sold can swapped for a straight-forward mortgage.

Rollong Bridge Finance is not cheap compared to a standard mortgage loan BUT compared to Bridging Finance it can be much much cheaper, and can avoid a lot of stress.

If you think you might need Bridging Finance, E-MAIL: george@in2consulting.co.uk

Comment » | Mortgages

Flexible Mortgages

November 9th, 2005 — 10:18pm

A flexible mortgage can be a life-saver as well as giving you more control over your finances than a conventional mortgage.

I am a banker by training and much of my new business is mortgage-driven.
Banks have an annoying and perhaps for you, a fatal habit. When you are doing well, you are bombarded with offers of Gold cards, personal loans, car loans etc. which if you took a step back, you might not want just now.

However, if you hit a bad patch when, for example:
* clients don’t pay you
* business slumps
* a family member (or you) are ill,
* rates drop because of too much competition (IT contractor pay rates have halved in the last few years I am told)
* overheads increase

and you suddenly find yourself in need of some help (credit) from the bank, you may find them reluctant to help.

This is when a flexible mortgage can be a life-saver. If you have an available credit limit e.g. £30,000, in excess of your mortgage arranged when things are good, then you can draw down on this and keep paying the bills on time. This can be the difference between staying in business and going out of business.

The above comments apply mainly to self-employed people but the tax advantges can be enjoyed by employed people too.

Supposing you have a mortgage of £150,000 on which you are paying 5% p.a.. You also have savings of say, £20,000 on which your bank might pay you 3.8% p.a. GROSS. The 3.8% p.a. is worth 2.96% p.a. NET after deducting 22% Basic Rate Income Tax and 2.28% p.a. NET after 40% Higher Rate Income Tax.

However, IF you place the £20,000 in your mortgage account, then you only owe £130,000 and will only pay mortgage interest on that amount. This is called off-setting. Since you pay your mortgage interest out of NET income, you are effectively earning 6.41% p.a. GROSS if you pay Basic Rate Income Tax and 8.33% p.a. GROSS if you pay Higher Rate Income Tax, on that £20,000. N.B. not all flexible mortgages have an off-setting facility.

Two words of warning here.
The above works only where you have the facility to draw money out of your mortgage account when you want to – quite a few so-called flexible mortgage allow you to repay when you want to, but will not allow you to draw the money back. You do need to check the procedure for drawing out money at the outset.

Having extra credit available when you want it, can be deadly if you do not have the financial self-discipline to go with it. If you just end up drawing down the whole lot, you will have no flexibility left and may end up in more debt than if you had had an ordinary mortgage.
The finance company advertisements you see on televison saying “I saved £500 a month on my monthly payments” by putting all the plastic debt bills onto the mortgage, do not mention this fact.

In summary, flexible mortgages can be a great financial tonic if used properly, but financial poison if misused.

For further information here, send me an E-MAIL: george@in2consulting.co.uk

Comment » | Mortgages

Strange Thing About Divorce

November 5th, 2005 — 4:38pm

Strange thing about Divorce – when I was first married, it seemed that everyone was getting divorced. When one of my daughters was at (Church of England) primary school, she remarked that in her class of about 30, ours was the only family where the parents were not divorced. Later when that marriage collapsed, I realised that in spite of so many people divorcing, most people were actually still married.

While my own life has moved on, I still help people who are going through it now. I work with divorce solicitors and some examples may show how things work out sometimes.

*Mother and daughter owned a flat and mum wanted to raise a 5-figure sum to pay the legal costs. There was a small mortgage and plenty of equity in the flat. The problem was that the daughter had missed some of her mobile phone payments a few months previously and the lender would not lend either of them any more money. This was sorted out in a month, and mum and the solicitor who introduced the case to me were very pleased.

*Mum & Dad with 3 young children were living in matrimonial home. Assets previously jointly owned had been sold and funds were awaiting distribution by the Court. A mortgage was needed to buy one of the parents a new home. Fortunately, Dad had a good job. The problem here was mortgage arrears. Dad used to give mum the money to pay the mortgage direct debit but mum decided to spend it (this happens quite regularly in divorce, I am told) No mortgage payments were made for 3 months and although dad had brought everything up to date, the lender would not give them any more money. This took 6 months to complete.

*Husband living on his own in the former matrimonial home. Should he move and pay his wife out of the sale proceeds or should he increase his mortgage to pay his wife off? Did the figures for both scenarios and he decided on the second option.

All the above cases resulted in finding other areas where advice was needed.

George Emsden – george@in2consulting.co.uk

Comment » | Uncategorized

Pensions – the “P” word

November 5th, 2005 — 12:57pm

Before we get to the P word, let me quote some truisms that apply to most people. First, the biggest asset most people will ever own is their home. Second, the biggest debt they will ever have is their mortgage. Third, the biggest pool of money that they will ever have is their pension fund.
The first two are fairly well known but few people seem to be aware of the third one.

There are 3 stages to our economic lives: childhood, working life and retirement. The only period when it is practical to put money away, is the second one. The reason for doing this is that when you reach 65 for example, you will have a big enough pot to provide you with an income so you will not have to work anymore. If you want to live on £30,000 a year and take an income of 5% a year from your pot, then “the pot” would need to be £600,000.

People tell me that they will be able to live on much less when they retire as the mortgage will be paid off and the children will be grown up but this is rather naive if you think about it.

i) Not having to go to work every day means you have twice as many hours to spend money – or think about how much you have or have not got – this can be depressing.
ii) Your wife probably does not want you at home all day
iii) My experience as an IFA also shows me that children are never really off your hands no matter how much money the parents have. They may need help with: a deposit for their first home, wedding costs etc. and one of the hardest things about being parent is saying “No” to your children.
iv) Going to Australia to see your grandchild for a month as one of my friends has just done, is not cheap either.
v) did you work hard all your life to have to spend the end of it, counting the pennies?

There is really no point in having a small pension. On the one hand you will not be able to live on it, but on the other hand it will probably be enough to disqualify you from State Benefits. The Basic State Pension has only been increasing at RPI since the 1980s and in real terms, is falling further and further behind earnings – the gap being 1.5% – 2% a year.

So how much do people need to invest into their pension? There is a very simple formula for this “HALF your AGE as PERCENTAGE of your EARNINGS” e.g. if you are 40 then you need invest 20% of your income.

If you want a more exact figure go to: www.pensioncalculator.org.uk

P.S. All the above assumes you have a healthy retirement. Facing an unhealthy one is now the subject of another blog “Growing Old without Dignity” http://www.georgeemsden.co.uk/?p=13

For an American view of the same issue – The Big train Wreck Coming – Boomer retirement plans are on a collision course with reality

http://www.fa-mag.com/issues.php?id_content=2&idArticle=1136

Regards
George Emsden
Your Financial Optimist

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