ENGINEERING THE FIGURES

TODAY’S BLOG

ENGINEERING THE FIGURES

There are many good things about social media, but I do get fed up with some of the narratives thrown around that, in my opinion, casually have an agenda. One topic that often gathers some traction is that of the property market. Most of us discuss the ludicrous price of buying a home at some time, some make much of their skill to invest in property, which is often rather more to do with luck than skill. However I have become very tired of the media holding out examples of some young people who got onto the property ladder and in so doing imply that others only have themselves to blame for their inability to do so.

DISTILLING THE TRUTH

I came across a couple of examples in the last few days. One involved a 28-year old whose father bought him a bottle of 18-year old Macallan whisky on the day of his birth and then every birthday thereafter. The headline suggested that this enabled Matthew Robinson to buy his first home. The virtues of foresight by his father and personal resistance of temptation netting the result of £40,000 worth of whisky. It’s a lovely idea and nothing wrong with it at all as a gift. I have some questions though.

UK Property

IN GOOD SPIRITS

Firstly, the whisky has not actually been sold yet and no home has been purchased. This deposit was not actually the hard work of Matthew but of his father. The only thing Matthew has done is follow his fathers instructions not to consume it. I wonder how it was stored, I suspect that the 28 bottles have not followed Matthew away to University or any other place he may have lived, they probably remained at his parents home (I am guessing). As a gift it’s a lovely one, as an investment…. Well, there are obvious risks – which no proper investment portfolio would have – concentrated risk and the past, current and future risk of total wipe out. I could literally destroy a portfolio of whisky in minutes. I could not do the same for any investment portfolio.

ROOM WITH A VIEW – TUNNEL VISION VIA BOX

Then there was the case of Jessica Leung who at 29 managed to buy a property worth £450,000 in Bristol, right opposite IBK Brunel’s the SS Great Britain. This, the headlines suggest was done by moving home to save rent and cancelling her gym membership. It turns out that Jessica was able to put down a £90,000 deposit, pay stamp duty and raise a mortgage of £360,000 on her own salary. It turns out that 30% of the deposit was from her father (£27,000) and “family savings” of £53,000 together with her own £10,000 make £90,000. In fact, Jessica had saved £10,000 not really £90,000. An engineering of “I saved the deposit” feat that Mr Brunel might marvel at. Given that she would likely require an income of £90,000 to borrow £360,000 then to be blunt she might have saved rather more.

Do not misunderstand me. I am not berating Matthew or Jessica or indeed their parents. To my mind these stories have rather more to do with making other young people feel inadequate and relieving the sense of guilt (we did absolutely nothing to benefit from property price rises)  that the rest of us have from time to time, when we recognise how hard it is. The truth is that the parents were instrumental in raising the deposits in both instances. These sorts of mixed messages are rife – a few months ago young people were chastised for buying lunch at Pret, now they are being told to do so in order to keep it open. The messages are all to do with supporting those in power who clearly have a lot vested in maintaining the property-owning class precisely as it is.

Rather obviously I work with clients to help them become financially independent and many parents want to help their children as these did. However, pretending that because some can that it is just a matter of personal disciplined saving by the young adult is utter twaddle. I expect nothing to change.

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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ENGINEERING THE FIGURES2020-09-07T15:28:05+01:00

UNCOMFORTABLE HOME TRUTHS

TODAY’S BLOG

DENIAL IS MORE COSTLY THAN THE TRUTH

Lockdown has been hard for many people. Freedom takes many forms and the freedom that most of us have taken for granted is the ability to meet other people and get out of the house for a change of scenery. Many have found the constant presence at home has exposed some difficulties within a relationship. Some have had their thoughts confirmed, for others this may be an acknowledgement of a truth that has so far been successfully avoided or navigated. The divorce inquiries to law firms is reportedly up 42% for the lockdown period when viewed against the same time 12 months earlier.

Tom and Rose – How Not To Get Divorced

As this is therefore rather topical, I think it worth drawing your attention to a real couple from London. I will call them Rose (50) and Tom (53) who had been married for over 20 years and had 3 children (21, 19 and 14) were divorcing. Proceedings began in 2018, sadly their divorce, which concluded in May 2020 (on Zoom) escalated fairly quickly.

Rose was a minor shareholder in her parents two family businesses. One business was a recruitment company providing staff to the care sector, the other was a care home. Rose was essentially a sleeping partner in both businesses, but Tom had become the Managing Director of the Care Home in 2005, this ceased once divorce proceedings began.

DIVORCE

Keeping Up Appearances

The couple had a very comfortable lifestyle with an annual spend of over £100,000. They lived in a 5-bedroom house in London. Rose wanted to remain in the family home but could not raise additional finance to provide Tom with his share of the equity (£350,000). The reality is that they lived beyond their means, Tom ran up credit card debts of £122,000 and both had soft loans from family members. The marital home was sold and both had to rent. The Recruitment business began to see a fairly significant drop in income, from £9.5m to £8.1m, but on the face of things a very viable business. However, when coupled with the personalities involved and allegations of misdemeanour in his role as Managing Director, this has the sense of a perfect storm.

Where has all the money gone?

As allegations about Tom were made, this added to the legal knots that they then managed to create. Anger and resentment continued to fan the flames of “he said, she said”. In the end, aside from their pensions (not yet available) and the notional value of shares in the family business, the legal fees left both with liquid assets of £5,000 each. You can see a rather good summary of the case here.

There are lots of lessons here, family businesses are more exposed to the knock on effects of marital problems. Overspending and a lack of communication about it between the couple is rarely good for any marriage. Reliance on funds from family members, parents in particular makes for further uncomfortable relationships. Finally, if you find yourself in a similar position, agree terms fairly and avoid the name calling and point-scoring, it serves nobody well, in fact everyone loses.

The Uncomfortable Truth

When it comes to planning, as I have said many times before, we make lots of assumptions about the future, the biggest assumption we make about a couple is that they remain together (unless they communicate that this is unlikely). One of the problems of thinking about what you want from life is that you become aware of what you don’t want, for many that can be ending an unhappy marriage. That has financial consequences that we can make allowance for, but only if we are able to communicate truthfully. Divorce does not have to leave a huge financial scar, it can be settled well. I am not a marriage counsellor, I have been married for over 25 years, I am however pretty certain that Tom and Rose regularly failed to communicate well with each other, particularly about money. Denial of reality isn’t really my thing, it serves nobody well. A good plan will help you face some uncomfortable truths.

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

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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UNCOMFORTABLE HOME TRUTHS2020-06-11T17:19:38+01:00

So, you know what I did this summer…

So, you know what I did this summer..

This summer reminded me that active experience of something is more helpful than a knowledge of it. I have not moved house for 21 years and this summer, circumstances were right for a move.

On average, people move house every 7 years. At least that’s one statistic that I heard proclaimed with great certainty. Obviously many of our clients have moved over the years, and I have also spent the last five summers moving my daughters between home, university, student houses and a first new flat. So the physical hauling of stuff and the “letting everyone know” is certainly a current, up to date experience.

We haven’t provided mortgage advice for a reasonable number of years and have referred this service to a very good adviser that does. However I am very glad we don’t, because the degree of uncertainty is far too uncomfortable for me.  Selling and buying houses brings out some rather unpleasant aspects of characters and I was reminded that just because someone agrees a deal, doesn’t mean that they will keep their word. Dishonest buyer intentions and motivations, attempting to manipulate every opportunity to their full advantage….perhaps I am just a bit naïve and not “cut-throat” enough.

Agents and disruption

The process was helped to some extent by technology, but if ever there was a case for some much overdue “disruption” the conveyancing and payment of funds process must surely warrant some smart techno-genius with ample opportunity to shake things up. Waiting for responses to questions, funds to clear, agreements to be honoured felt far removed from this instant internet age. Apparently nobody knows a conveyancer that is any good… (least of all Estate Agents who deal with them all the time). I did not know this.

Still, we got there in the end, happy enough with the agreement. Like everyone else I don’t want to have “paid too much” or “bought at the wrong time” but equally, this is a house for a home, not a share. Sure we are investing in the future, but there’s rather more to it than simply the price tag of a house isn’t there.

As for the Estate Agents… despite the general national view, I found all of them to be genuinely helpful and decent people, sure there was incredibly good use of photography and a couple were poorly informed,  but my experience was pretty good, I have no complaints…. And I now have far greater empathy for those of you that have been through this process in the last few years. Stress levels get tested needlessly, I certainly hope that when it comes to financial planning, we remove all unnecessary stress.

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

So, you know what I did this summer…2017-01-06T14:39:14+00:00

Should I Buy A House?

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Should I Buy A House?

I recently asked for questions and so I’m going to tackle those that I get. So I’m starting with someone at the very beginning of their financial life asking if they should buy a house.

A house is an asset, it is also a home, but frankly whether you rent or buy, a home is something you create. In Britain, we laud home ownership as a goal to strive for, most of the world doesn’t and most of Europe rent.

Why Buy?welcome-home

The short answer is that you have control over where you live. If I may make the wild assumption that by the time you retire any mortgage is repaid, this means that you aren’t still paying rent or facing the regular prospect of renewing your rental agreement or moving. You can, within local bureacrat (sorry… I mean Authority) rules do what you like to your own home. You cannot knock through walls, convert a loft if you don’t own the property.

The Upside of Renting

You aren’t tied to a building, you don’t have to pay for upkeep or repairs. You have no mortgage, so no liability.

The Upside of Buying

You are “tied” but could sell – the issue is timing (no buyers?). Having an asset means other finances are easier – Banks think you are a lower risk, because you are a homeowner. Credit (which means debt) is easier to obtain.

Property prices rise and fall, but generally rise over the long term. It is as the TV pundits suggest, all about location, location, location.. which means where do people want to live? If you own the property you could rent (let) it, if you need to live away from it. However, this needs approval if you have a mortgage and you should never misrepresent the truth to a lender, that is asking for trouble.

Buying a home is a long-term commitment right?

Well yes it is… but one could argue that renting is a longer-term committment. Do you intend to rent for life? the cost of renting will also rise over time (with inflation). Renting is generally about afforability, in retirement, this means having a good pension or source of income to pay the rent… for the rest of your life.

Fear Factor

Property prices have risen enormously. The real issue is “are properties overpriced?” the honest answer is – of course they are. The entire system is built on vested interests. Lenders need to lend, (Governments need lenders to lend), Estate Agents need to sell, Surveyors need to survey and so on… the prices have been pushed up because homeowners want to make a profit on their home when they sell and move on – to larger or smaller valued homes. The system isn’t particularly good or fair, but it is the one we have today and I dont see much likelihood of it changing.

Buying and Mortgages

Most people have to borrow money to buy. That means a long-term loan and one that you need to be able to afford. There are different ways to repay, but you have to repay the loan at some point. However inflation does help. Let me explain.. a property is £250,000, you have a £50,000 deposit and so need to borrow £200,000, which for the sake of example, will be reapid over 25 years. After 5 years how much is the property worth? the same? more? less?… and after 10,15 or 20 years? Well generally proprty will rise, let’s say by an average of 3% a year. Without doing anything to increase the value of the house, after 25 years the property is worth £523,444… the mortgage is repaid (because you agreed to repay it over 25 years). Your equity (what you really own) has increased from 20% to 100% over 25 years…. but if you rent, well you still own “nothing”.

Keep it Real

As an exmaple, if you can borrow £200,000 over 25 years at 4% interest, your repayments will be £1,067 a month. Making the huge assumption that rates don’t change (they can rise or fall, or you could fix) then your repayments will be falling in real terms due to inflation. Rent costs will almost certainly be rising, every year… let’s look at a possibility.

Mr Holmes

Mr Holmes earns £57,500 buys a property for £250,000 in 2015. He has to borrow £200,000 and begins paying £1,067 a month (£12,804 a year – about 22% of his income. His salary rises by 3% a year (lucky him! today… but not unreasonable looking back and I haven’t assumed promotions etc). After 10 years His income is £72,275 and he’s still paying £1,067 a month (now 18% of his income). His house is now worth more at £335,979… so he’s gained £85,979 since buying it. His mortgage is gradually reducing, it takes a while by £200,000 has reduced to about £142,000 – he’s cleared about £58,000 in 10 years. At the end of 20 years his mortgage is now only £56,500, his income is now £103,850 and his monthly payments are still £1,067 and about 12% of his income. Another 5 years and the mortgage is gone… no more payments. He’s done, but his home is still rising in value.

Mr Rentit

Mr Rentit earns the same amount and found a similar property to rent but it only cost him £700 a month to rent. He has the same job and earns £57,500 a year. Mr Rentit isn’t a fool, and he decides to save the £367 a month that his friend Mr Holmes is shelling out each month. He puts this into a tax free ISA which grows at 7% a year (he’s fairly adventurous). At the end of 10 years Mr Rentit’s rent has increased each year… but only by 3% the same as the price houses are rising by. So after 10 years he is paying £1434 a month – double what he started paying. But he has no mortgage, and his ISA is worth £64,259… ten years later he’s paying rent of £1,927 a month (still 22% of his income). His ISA is now worth £192,662 and he has no mortgage. However he’s now a little concerned that rent keeps going up and thinks that his ISA could probably buy a house – just like the one Mr Holme’s has. But that is now worth £451,000 and he only has £192,662. So if he wanted to buy he’d need a mortgage of £258,338.As it is he is facing a lifetime of rising rental costs…. so let’s hope his pension can cope.

To be fair, he had the same £50,000 deposit 20 years ago and it had been in his ISA it would be worth £393,117 and he would still need a mortgage of £57,883 and pretty much level-pegging. He might argue that Mr Holmes had 20 years of upkeep costs and home insurance – that boiler that was replaced.. twice! and so on. Yet Mr Rentit may also be forgetting those letting agent fees, the moving costs and the hassle that he spent trying to register with the local GP/dentist etc eaxh time he moved.

Now, my example is obviously flawed and full of linear assumptions about inflation and the largest being a 4% difference in ISA outperformance of inflation/property prices. None of this will become reality. We could make the numbers prove one case or another (with the wrong assumptions). The issue is one of having an asset or not.

My experience is that most would not be like Mr Rentit – they wouldn’t save the £367 a month and those that did probably were tempted to raid the pot, so would have less. Most investors panic in market crisis, so probably wouldn’t get a market return unless they had a decent adviser… Most homeowners do improve their home, making it more valuable – but there are certainly upkeep costs.

The short answer is really – few people are “better off” by renting. In 40 years time (perhaps at or in retirement) Mr Holmes would still be having to pay rent of £3,480 a month…which means his pension would need to be able to provide this, Mr Holmes would not. So part of the answer is about discipline… and Mr Holmes, being a client, would have saved more of his income despite his mortgage costs, we would have advised him to high-speed repay his mortgage, freeing up income later to squirrel away… but that’s another story.

Dominic Thomas

Should I Buy A House?2017-01-06T14:39:30+00:00

Why is it better to have a good deposit for a house when buying a home?

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Why is it better to have a good deposit for a house when buying a home? The short answer is that having a large deposit is cheaper for two key reasons. Firstly you have a greater choice of lenders who are willing to offer a mortgage. Secondly, the rate of interest that you pay is much less (currently almost 2.5 times less). A third reason would be that it is a larger buffer against a sharp fall in property prices, reducing the possibility of negative equity, which in the US is no big deal, because they just hand the keys back, but here in the UK you have to pay your debts.

What is the Government Help to Buy Scheme? SafeHouse

If you believe the owning property is a particularly good thing, you may well support the Government help to buy scheme, enabling people to buy their first home. Since the credit crunch lenders have cut back the amount that they lend and the risk that they take. As a result it is difficult to find a competitive mortgage rate unless you have a large deposit of significant equity in your home. The new Government scheme basically underwrites the risk which is not passed on to the lenders (several of whom we all effectively now own). So to be blunt, the taxpayer is taking the risk… again.

Why have property prices risen so much?

I am not against property ownership at all. However current property prices are daft. They are fuelled by overzealous estate agents, surveyors and lenders who all essentially collude in the myth that property is fairly valued. Frankly they all have to, because to do otherwise would be so out of touch with the market that they would go out of business, so I’m not blaming anyone. However the main culprit is the lender, who essentially makes money out of nothing (they do not have the resources to back the loan; merely re-lend your deposit and all of our collective cash. This “easy money” has fuelled the myth that property values have soared legitimately. They haven’t. There is a massive disconnection between income and property prices. As salary inflation has remained relatively static of late and property prices have “risen” the gap is constantly widening. Sadly, there are no easy solutions – big salary rises or a reversal of property valuations.

How much more is a 90% LTV?

Britain is peculiar in its obsession with home ownership, most of Europe rent. That of course does not mean the we Brits are wrong – look at the state of European finances and we are apparently rather savvier. Today’s news that if you have a 60% mortgage (40% equity or deposit) your mortgage is likely to cost you almost 2.5 times less than someone with a 10% deposit. In short it pays to have cash and to have less debt. You know this of course, but that doesn’t help the next generation who are going to struggle to buy a home and due to inflated property prices the size of the deposit is becoming out of reach for many. So rather than address the root causes, the Government has merely said, borrow the money and they will cover the risk. Not what I would call wisdom in action, but by far the most palatable of alternatives of massive salary increases (which may not work) or a massive property devaluation.

Dominic Thomas: Solomons IFA

Please note that we do not arrange mortgages, if you want help with a mortgage, we can suggest a very good independent mortgage broker.

Why is it better to have a good deposit for a house when buying a home?2017-01-06T14:39:44+00:00

What is great financial planning?

What is great Financial Planning?

Financial planning is something that I have a real passion for. It is my belief and assertion that when done well, proper financial planning is akin to a light bulb moment or a bit of an epiphany. In essence as a financial planner I address the fundamental question that clients ask (even when it isn’t verbalised)… will I run out of money?

Living Deliberately

A financial plan is essentially your lifetime goals, perhaps aspirations, but clear, well defined and thought-through goals. This process can take some time to get right – not because the process is difficult, but because most people simply don’t know what they want out of life. American life coaches probably call this “living deliberately” rather than “living by accident”. In other words – if you don’t have a lifeplan, how can you make good decisions.

Treasure the questions

The questions can be fairly straight-forward – “Can I afford to buy this house and pay off a mortgage, run it and still afford to live in it when I retire?” or perhaps “I’d like to retire from my job at 60 not 65, but can I afford to do so with all of my commitments?” or “I have worked hard to build my business, what I need to know is what is the sale price I must achieve to do all the things I am working for?”.

Sometimes the questions are less clear – “Can I afford to start giving money away to my children or will I need it later?” “Can I really afford to spend all this money in my retirement? will it run out?”… “What investment return must my savings and investments achieve as a minimum?”

Yes there are lots of assumptions, proper financial planning will involve use of some type of cash flow modelling – certainly assumptions about the future, but these are reasoned, reasonable and reviewed.

Seeing is believing… take it from a doubting Thomas

A great financial plan, will provide answers to the questions that you have thought of and hopefully quite a number that you didn’t. Seeing this graphically represented is a very powerful and profound experience, something that enables you to make better decisions and understand why a financial planner is no more interested in financial products than you are – we are interested in solutions.

What’s your passion? your dream?

Salmon Fishing In the Yemen” is a really great “little” British film which seems to capture an aspect of current times. I won’t give the plot away, (its well worth seeing with a fantastic cast and director) but in essence stereotyped cultural barriers need to be crossed in order to achieve an ambition… a vision, which sometimes means going against the flow.

Vision is more than eyes to see

To some, what on the surface seems daft, ludicrous or mad really poses the question – do you understand the vision? not just the “head-stuff” but the “heart-stuff” too? Great financial planning must connect with what’s in your heart, not just in your head, after all, we’re talking about your life, not a hypothetical one. As one of my favourite dance bands “Faithless” suggest “you don’t need eyes to see, you need vision” (Reverence track from the 1996 album of the same name).

Here is the trailer for Salmon Fishing in the Yemen, a movie that I really enjoyed.

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

What is great financial planning?2017-01-06T14:40:06+00:00
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