Money Box – Interest Only Mortgages

Solomons-financial-advisor-wimbledon-blogger

Money Box- Interest only mortgages

If you follow me on twitter you may be aware that I was raising some concerns about the reporting of an item on BBC Radio 4 Money Box and BBC1 Breakfast about interest-only mortgages. Let me be clear I do not provide mortgage advice – we refer this to someone that does – should anyone require it, we encourage clients to clear off debt and mortgages as quickly as possible.

Paul Lewis relates the story of Christine, a woman now 70 years old, bought her flat in Liverpool in August 2004 at the age (I assume) of 58 with a ten-year mortgage of £151,774. It was an interest only mortgage, meaning that she was only paying interest, not the loan which would need repaying at the end of 10 years. Having had 2 years extra time to repay the money, her lender (Santander) has now given her until 24th November 2016 to do so or face legal proceedings.

There is not enough information (as ever) in the story presented to be able to provide any solid advice. We are told that there is no equity in the property (the value of the flat less the mortgage). This could be because the flat has not increased in value at all since 2004 (which whilst possible seems a little unlikely) or it could be that she has amassed other debt which has wiped out any equity that built up over the last 12 years. The reality is we don’t know and in any event, this is the situation she is now in.

We are told that Christine now (in 2016) has an income from pensions of £1,100 a month and her mortgage costs her £600 a month. It is unclear if she has any other savings. The story is clearly upsetting to Christine, but I am suspicious of what is being reported.

What is missing?

If the angle for Money Box is the possible miss-selling of the mortgage then some better factual information is really required. As I have said I don’t arrange mortgages, but it would be unusual for someone to borrow £151,744 without an income to justify this (typically 3.25x income, which would mean requiring an income of about £46,700. Being 58 at the time she was only 2 years away from receiving her State pension. So what income did she declare? And was the lender really offering a 58-year old a 100% mortgage within 2 years of retirement? Now that would have some grounds for complaint about bad advice. She cannot “recall” being offered a repayment mortgage or anyone asking her how it would be repaid.

But there was a foreign property…

Christine is certainly very unclear about what an interest-only mortgage is, thinking (for a some reason that it would continue) when she knows it wouldn’t (not outstanding until she dies) and of course would be clearly stated on the annual statements and original mortgage offer. Christine provides what appears to be conflicting information, recalling when asked how she expected the mortgage to be repaid, she mentions an intention to sell a foreign property to help do so. Sadly this “crashed” but again merely demonstrates that rather more (and better) questions need to be asked. More information is needed, but is woefully lacking.

Clarity or Charity?

When Christine was asked a direct question “Did you not understand what interest only meant?” she replies “Yes, you were just paying off interest that they were charging on the house itself and not off the property. That is how it was sold to me”. The reporter does not challenge her statement which makes no sense at all unless by “house” and “property” she really means mortgage/loan or capital (read it back to yourself).

The Coming Mortgage Apocalypse….

The only clear thing is that she appears confused, not fully understanding how mortgages work and is certainly distressed. Money Box seem concerned that lots of people are in a similar position, reporting that over 160,000 interest-only mortgages are due for repayment within the next 2 years. Money Box report that about 2million people have interest-only mortgages and that 1 in 8 (12.5%) of them appear to be like Christine, not realising that the money needs to be repaid (though presumably having been asked the question they do now know). Importantly 40% claim that they will struggle to repay the mortgage in full.

This of course is probably the real scare story or anxiety that Money Box wishes to convey and the implication being that this is the fault of unsafe products and a bad industry of bad lenders and bad mortgage advisers…. which will lead to are creating more homelessness. Well as with all things, there are likely to be some, (bad ones) but such generalisations and calling for yet more regulation is a far stretch, when in practice this has more to do with some people not understanding the commitment that they are making or claiming not to understand.

There are more options than you think

Christine is very worried, understandably, she has my sympathy, yet it seems that the only options she has discussed (remember there is a financial adviser “on hand”) is going into an old peoples home or a hostel. It sounds to me as though her adviser is pretty useless if this is the case. A quick search of properties to rent in Liverpool for £600 or less reveals over 2,000 listed as available.

The Power of Denial

“It’s a terrible thing that’s happened, that I never thought it would come to this”. Well it is certainly hard, but Christine has £1100 a month of income and can chose how to use it. Renting is a viable option. So I am left feeling that this is more a report on the power of denial – denial of reality. Something has clearly gone very wrong, with poor budgeting and planning. This does not make Christine innumerate, frankly successive Governments fail far more spectacularly and one wouldn’t really accuse them of innumeracy or financial illiteracy, as tempting as it may be.

I’m left with the impression that this is a story of not wanting to understand, rather than not being able to understand, which is perhaps true of Money Box as well. Accusing lenders or advisers of mis-selling is a very lazy approach, when actually Santander has been providing information and already extended the deadline by 2 years.

Paul Lewis ends the piece with a nod to the debt-counselling charity Step Change, which implies an awareness that there is rather more here than simply clearing the mortgage by selling the flat and what is actually missing is a fundamental grasp of a budget and the reality of consequences. Getting out of depth financially is not a sin, it can easily happen to anyone, (and I do mean anyone… even billionaires!) the key is facing the truth and exploring options carefully.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Money Box – Interest Only MortgagesDominic2023-12-01T12:19:03+00:00

Can the Money Box Producer invest £5,000?

Earlier this month Money Box, the BBC Radio 4 programme decided to find out how easy it was for a complete novice to do their own investing. He has a sum of £5,000 representing his life savings, which is otherwise held on deposit in his bank earning less than 1% interest.

Financial Planning Basics

It is true to say that basic financial planning is straight-forward, yet most people fail to do the most basic tasks. Financial advisers may therefore spend considerable time, helping clients to get the basics in place. This was touched on in the programme, but very briefly. In essence, ensuring that your finances are under control, knowing what you spend and what you earn, having suitable reserves (3-6 months of spending). Having a Will, adequate financial protection and clearing debt etc.

Too small-fry?

As a result the starting premise of the show is how to invest £5,000. In truth the vast majority of financial advisers are not really interested in this level of work. Its not financially worthwhile and its not satisfying work. A good planner will take investors through a risk assessment, invariably a questionnaire which helps start the process of explaining and understanding investment “risk”. In truth this ought to be a straight-forward process, but it often isn’t. DIY investing is fine for low levels of funds, but when the sums get bigger, so does the complexity.

How much is a pint of milk?

Sadly Wesley didn’t really do DIY investing. He asked for advice and then went to the investment company to find that they required £100,000 as a minimum to invest directly through them. Alternatively he could access the fund through a platform. He then asked a very good chap Mark Polson, who assesses platforms for people like me, about which platform to use. This is an art and science. However, Mark rightly points out that using a platform will cost typically 0.25%-0.35% for using their administration. That’s £12.50 – £17.50 for a £5,000 investment. I’d call that peanuts, though I’m sure Money Box would disagree.

Investing is not gambling. Gambling is gambling.

I was also disappointed to hear the description of investing as a “gamble” from someone in the know (Candid Money). It carries risk but it is not gambling. Thankfully ludicrous questions were kicked into touch and Mark also pointed out that “best” and “cheapest” are two different things. Paul Lewis also seems to think that charges are a loss. They are a cost of investing, not a loss (and free banking isn’t free, its cross subsidized by loans etc).

The DIY Investor

I have lots of sympathy with people that find financial planning expensive and also have had bad experiences. I recently met with a potential client who is a DIY investor, but really wanted to know how to minimise capital gains tax. He was a bright guy, but fairly unusual, holding shares in just two companies worth a good six-figure sum. Whilst he seemed to appreciate the risk he was taking, I had serious doubts. He had no clear idea of the returns achieved and not kept any good records. For all I know he may be a genius investor (unlikely) but my suspicion is that his approach was born out of an understandable mistrust and fear of being ripped off, yet in practice he was (and is) in serious problems should his two shares take a turn for the worse. The main winners will be HMRC as he has not used any capital gains tax or ISA allowances over the last 20 years (use it or lose it).

DIY is spending time to save money, yours.

DIY investing is not something to be undertaken lightly. I am learning new stuff almost each day and I’ve been doing this for over 20 years. Frankly, any professional skill can be learned by most people. Yes I could even learn to be a brain surgeon… but do I want to? am I actually playing to my natural interests and skills? if time is short, why would I waste it learning about stuff an expert can do for me? (and with whom I have a professional relationship). I tend to find people tend to fall in one of two camps – spend time to save money, or spend money to save time. DIY investors are the former (by doing it themselves) but beware it takes a lot of time, whereas you could focus on the things that actually improve your employed skills and therefore your income, or simply spending time on doing the things you love. Oh and Money Box – “ad valorem” is a fee based on the value of a portfolio, in short a percentage. There is definitely a need and place for DIY investing, but check where you are really coming from before you embark on this rather lonely and arduous venture. You don’t want to find that all is lost…

Dominic Thomas: Solomons IFA

Can the Money Box Producer invest £5,000?Dominic2025-02-03T10:39:28+00:00

Moneybox and the Diamond Scam

This week BBC Radio 4 Moneybox featured a story about a diamond scam. This is sadly a rather familiar tale and one that prays on financial naivety. It’s the classic boiler room scam, a cold call from what sounds like a busy dealing floor (though why the sound of lots of people on the phone should suggest something good is rather beyond me). Anyway, the latest revision of this scam is in the form of diamonds… which of course is nothing to do with the stoc kmarket, which to some “investors” has appeal as a possible form of “alternative investment”.

Don’t miss out before its too late! (er… no)

The promise is… yes you had better sit down for the obvious statement “this will provide a guaranteed return of XX%”… which is never true for the investor, no matter who says it. The only guarantee is that there is no such thing as a guarantee. Everything carries risk. However it’s back to that same old phrase – if it’s too good to be true, then it isn’t true. Yet so many people forget this, when placed under pressure… pressure from another person at the end of the phone…which you can hang up… yet our nature is to be nice, friendly, amenable and rarely do people like to say “no”…. well a lot of people (it is alleged).

The carat carrot… what’s up doc?

Back to the scam – the diamonds may not even exist, you haven’t seen them, and so there is only a verbal suggestion of their value (even if this were a written valuation, it should be treated with caution). The price of the diamonds is naturally inflated, by an estimated 1500% and the broker/trader… oh lets call a spade a spade… criminal, takes a 25% commission cut… which is the only guarantee. Now of course, it’s wrong that anyone gets taken in by these criminals, but it is particularly concerning that they target the elderly, who are more vulnerable.

New tales, old tricks

How is this different from the penny shares sold by the Wolf of Wall Street? Well, it’s not much different, the process and tactics are very similar – selling much overpriced things to over optimistic “investors” who will never recoup their investment. This isn’t investment, its basically stealing… not to mention that there are serious issues about conflict diamonds, as highlighted in the 2006 movie “Blood Diamond”.

The question behind the action

Of course building a diversified portfolio is sensible, so that your wealth is not exposed entirely to the stock market. Hence why when we create a portfolio it has a variety of different “asset classes” within it, including cash, alternatives and potentially a wide range of different sorts of investments. So I have every sympathy with someone trying to diversify their portfolio – a good adviser will do this. Oh and by the way, it was a financial adviser that raised the alarm about the scam to the victim (not the media, not “the internet” , not the bank, not the best friend and not the regulator)… I’m feeling a little sanguine as the obligatory levies that advisers pay to regulators in their various forms (FCA, FOS, FSCS) have increased a staggering 300%… and frankly that feels like a very big scam.

Dominic Thomas: Solomons IFA

Moneybox and the Diamond ScamDominic2025-02-03T14:17:20+00:00

Money Box asks has your pension been burgled?

Money Box asks: has your pension been burgled?

Once again pensions were in the news, the Radio 4 show Money Box took on the rather complex issue of annuities. Charges, fees, value for money Financial Services Consumer Pension and even the very funny Jeremy Hardy’s comments on The News Quiz also received some mild stick, following his joke about not wanting to understand anything about annuities, or listen to Money Box and his intention to be a burden to the State..of course he was being ironic.

Yawn… annuities are just so dull

Anyhow, Jeremy is pretty much right, annuities are very boring and not something to spend too much time worrying about… until you actually need to. So what is an annuity? Ok simple stuff… an annuity is an income for life. You can have a rising income or a level income. Importantly an annuity dies with you.. eh? When you die your annuity stops… but if you want you can build in some guarantees… such as the income continues to pay a spouse or your estate, in full or part.. you can build this in at the design stage, not later on.

So why are Money Box and the FSCP talking about annuities?

Well, most people have no idea what to do and most is a lot – something like 400,000 people retire and buy a annuity each year. It’s a large market. Most people assume that there is not much between annuities (sadly and expensively wrong) there is an enormous difference and it costs you no more to get the most suitable one (on the whole). I’ve not met anyone that likes a pay cut, particularly one of 20% or even 40%… yet that is precisely what the wrong annuity is effectively like….for life!

So can I shop around for a better annuity?

Yes, you should (no you MUST). Start by checking out the MAS site, the site that supposedly advisers dislike, yet pay for via our fees… and plug in some details. If you like to be frightened, do this now. This is only part of the story and did you notice all the disclaimers? You could then approach the annuity providers yourself and set up your annuity. You won’t get any more money than if you did this via an adviser, but the provider makes a bit more money out of you, and you carry the risk for picking your own.

So should I use an annuity broker?

Well you could, but be warned that they may simply focus on getting you the biggest annuity (which seems ok doesn’t it?). If the company provide guidance rather than advice, they are not liable for any mistake, you are. They will charge a fee for their selection. However, this might be akin to going to a garage with a car that has a flat tyre and won’t move… demanding a tyre at a decent price… but failing to observe that the car has no engine (ok it’s a metaphor). My point being that there is no context for good planning, it’s just selling or arranging products, as Paul Lewis reminded the listeners.

So should I pay for financial advice about annuities or retiring?

Well, I would say this wouldn’t I, but of course! There are lots of issues and lots of solutions. My main gripe with annuities is simply that once you set one up, that’s it, decision made for life. A bit of a straight-jacket if you ask me. More importantly perhaps the adviser is qualified and responsible for the advice.

So what will a good financial planner do?

Start by forgetting about products. Discuss your plans for your retirement and determine what that really means for you. In short, what lifestyle are you aiming for? How much will it cost? So this is about income, not products. The sort of things that need thinking about and understanding are your requirement for income, your tax position, your other assets, your marital status, your expectations about inflation, your health and how long you will live. Advisers need to help work through the tricky discussion about the risks of not knowing. There are alternatives (lots) and of course there is the option of not even buying an annuity at all. Good financial planning is not about products it’s about figuring out what you really need and then building a plan to get you there.

Do financial planners have to arrange products?

No, but we often do. I really wish that Money Box would grasp this point. A good financial planner may not ever arrange products at all (I have a dream)…frankly because arranging products is a pain and very, very dull. Solving problems and helping people to get the life they want… well that’s an entirely different matter…however if you want a job done properly…

Anyway, keep up the good work Money Box… time often seems against any proper full discussion on the main media channels, so I am currently toying with my own show…well a podcast anyhow.

Dominic Thomas: Solomons IFA

Money Box asks has your pension been burgled?Dominic2025-02-03T13:27:39+00:00