Last year, I arranged a £500,000 mortgage for a client on a self-certified basis. During our discussions, it emerged that he was talking to another firm to buy their business – the owners were retiring. The purchase would fit his plans very well as they had complimentary areas of business. His bank had said he could not have the money so he asked me. I asked him how much the new business would cost and he said £10 million. I said that I would see what I could do.

About two weeks later, I was able to tell him that he could have the money provided:

the property valuation was OK – cost say, £8,000
the business valuation was OK – cost say, £23,000
he was prepared to give up say, 25 per cent of the equity so he would have owned 75 per cent of the company

As a safeguard, I suggested that he should have a “lock out” agreement with the vendors before he spent out any of the above costs. This would prevent the owners selling to anyone else and would be an indication of good faith on their part.

If the client had had a commercial property of his own, then it would have been quite straight forward for me to arrange a commercial mortgage. However, as he did not have this, then outside capital was required and the investors would want some stake in the new business.

This transaction did not go forward but my client now knew he could buy other businesses provided they were in reasonable shape and fitted his own business model. Other business is in the pipeline and this is an interesting new area of business for me. The size of deals so far has varied between £300,000 and £10 million.

If you are looking to expand your business, please contact me: george@in2consulting.co.uk

We really are a nation of optimists. Only about two per cent of people currently contribute the maximum amount to their pensions and get the most tax relief available (under the current regime). The attitude of most people to old age and retirement seems to be “something will turn up” like Mr Micawber in David Copperfield by Charles Dickens. Another blog below “the P word” covers this in more detail.

However, whatever daydreams people have of their retirement always assume that they will live out their years in good health. The only ones who really have a realistic vision here are those actually have to care for their parents or others. John Major famously spoke of “wealth cascading down through the generations” but this conveniently ignores the cost of care when one cannot function as an able-bodied person. A couple have a huge advantage here but when one of them dies or needs care themselves, then old age can become a nightmare.

One could describe my professional life as a financial dentist or financial GP, since an important part of it is asking awkward questions and getting people to think about the unthinkable. Most people get scared when asked about life insurance but long term care insurance which will pay for care when one cannot keep oneself clean, move about or have to be fed with a spoon really scares people.

When asked about paying for long term care, a common answer is “I have BUPA” or other private medical insurance but it is amazing how many people do not realise that private medical insurance will not pay for permanent (chronic) conditions. Private medical insurance only pays for (acute) conditions which be cured.

If you need care, there are four main choices:

1) pay for it yourself
2) my daughter/son will look after me
3) take out insurance while you are healthy
4) pay a lump-sum to an insurance company which will guarantee to pay for care for the life of the person concerned.

Pay For It Yourself

This is the simplest. The GP will know the local care agencies and since this type of work is not very well paid, it should not be too expensive if only light care duties are required. If you can hire a carer directly, then this is much cheaper than going through an agency but there are nightmare stories here.

My Daughter/Son will look after me

The old saying goes:

A son is a son
Till he takes him a wife
But your daughter’s your daughter
For the rest of your life

If a daughter or son wants to look after their parent, then more power to them. But for cultures which no longer have the extended family, this is probably the most expensive option.

Take out Insurance while you are Healthy

This is where life gets interesting. This type of insurance pays for care at a specified level of physical or mental disability.
The first policy of this type was issued by Commercial Union back in 1992. Norwich Union, BUPA, Permanent Assurance (remember them?) and others came into the market.

But most deserted the market after reinsurance costs went up by 200% and it became obvious that applicants were only applying very late in the day so it was a question of when the applicant would claim rather than if.

How long before beneficiaries start suing their advisers or solicitors because their inheritance has been spent on the cost of care for their parents?? The polices have been available for a long time.

Pass the Risk to an Insurance Company

The saddest and most threatening question when looking at paying for care for a parent for example, is “What is going to run out first? the parent or their assets?” Facing a question like this takes a lot of courage for all concerned.

The cost of care is essentially an open-ended commitment and most of us have limited rather than unlimited resources. Insurance companies handle this type of situation every day.

I remember one case where this worked very well. The mother of a client needed a lot of care and decided that she needed to move into a home – the annual care costs were about £23,000 and this was a few years ago. Her only asset was a cottage worth about £150,000 which she sold. I arranged for her to pay a single premium of about £73,000 to an insurance company which paid her care costs every month and this benefit was indexed. She gave the balance to her son as his inheritance. He was engaged so this was the deposit on his first home.

If you are planning how you might pay for care for yourself or for someone else, please send me an E-MAIL: george@in2consulting.co.uk

Much of my business is mortgage driven and clients often ask me what I think will happen to interest over the next month, six months or year. The only honest answer I can give here is “I don’t know”.
A classic case was yesterday, when I came into the office on the Bank Holiday to clear things before business starts to pick up again after the festive break. There was an e-mail from a client who asked me to contact him urgently about a remortgage. I called him and the first topic of discussion was whether he should go for one of the fixed-rate products or not. I pointed out that there is always a gamble when choosing an interest rate product. If you think about it, if you FIX your interest rate payments for a set period, then you are basically gambling that interest rates will not go down. If you go for a VARIABLE or tracker product, you are basically gambling that interest rates will not go up.
Later during our conversation, he quoted an article saying that interest rates would be lower by the end of the year, what did I think? I gave my usual answer. On my way in this morning, I bought The Daily Telegraph at the station which had the front page headline “2006 The year of rising prices * Train Fares up 9% *Power Bills up 12% * Council Tax to soar” which suggests the opposite.

Since 1997, interest rates have been set by the Monetary Policy Committee at the Bank of England. Their job is to try and control inflation through adjusting Bank Rate which is currently 4.5% p.a.. They have been given a target inflation rate of 2.5% p.a.. If inflation goes up, they will increase the rate, if it goes down, they will reduce it. That is the simple version, but the nine members of the committee do not always agree and the minutes of these meetings which are published a short time later, show some disagreement among the MPC members.
Just to complicate matters, the Chancellor keeps changing the definition of inflation and since 1997 has removed mortgage payments and Council Tax from the Retail Price Index definition which surprise, surprise makes the figures looks better. This is supposedly done to keep us more in line with Europe but then they are thinking of including mortgage interest in their inflation figures!

Demand for mortgages like anything else, depends on supply and demand. Demand is also directly related to what people can afford.

Since 1997, there have been over 60 stealth taxes which slowly but surely are reducing the standard of living of people in the UK. One of the more worrying things is the steady decrease in the percentage of First Time Buyers in the mortgage borrowing figures. Getting on the housing ladder has always been difficult but most people want to move after about 7 years – this is the national average but with my own clients who are mainly in London, the average time before people want to move home is much less. If there are less First Time Buyers around to buy these properties (less demand) then prices will fall or reduce in the long term. In practice, people usually cannot afford to sell at a loss so they stay put, which means that plans to have a family for example are usually delayed. No wonder the birth rate is falling and people are living at home till their thirties. This is not good news for house values in the long term. Recent increases in Stamp Duty Land Tax together with the end of MIRAS (Mortgage Interest Relief at Source) have made life even more difficult for First Time Buyers.

With inflation creeping up as per the newspaper headline this morning, then the effect sooner or later will be to increase interest rates rather than reduce them – so life for people who want to buy their first home is not going to get any easier. My client who owns his own home already, is one of the lucky ones.

If you want to do a bit of Crystal Ball Gazing yourself go to:

http://www.bankofengland.co.uk/monetarypolicy/decisions.htm

George Emsden – george@in2consulting.co.uk