20 August 2019

How to get a 100% Mortgage

The continual rise of house prices has caused problems at the bottom end of the market. First time buyers in particular find it difficult to raise enough capital for a deposit, while more restrictive (more sensible?) lending rules mean that obtaining a mortgage is more and more of a challenge.

On the other hand things are becoming easier at the other end of the age range. Equity Release plans are becoming ever more popular, with more lenders entering the market offering a wider range of cheaper products - that means lower interest rates in this context. There are also the new Retirement Interest-Only mortgages (RIO).

Combining those two facts leads to the possibility of mum and dad (or grandma and grandad) taking out an equity release plan in the form of a lifetime mortgage or RIO mortgage on their own property. That would raise a sum of money which could then be lent to the children to cover all or part of the purchase of their own house.

The children could cover the interest payments out of their own income ensuring that the parents or grandparents were not out of pocket, while being more secure than if they had relied on a traditional lender.

The capital could either be seen as a long term loan, or perhaps as an advance payment from the parents' or grandparents' estate. Depending on the situation it could even be used to reduce an Inheritance Tax liability.

I would recommend a brief written agreement to ensure that all parties had the same understanding - this is a long term arrangement, after all, and it would be easy to forget what was agreed.

Some creative planning is certainly possible, but all the options, pros and cons need to be considered, so professional advice is important.

22 April 2019

The Myths of Passive Investing

I believe in passive investing ... almost as much as I believe in active investing! If you are not familiar with the terminology let me briefly explain...

In broad terms "passive" investments refer to investment funds whose value follows an index (the FTSE 100 being a well-known example), whereas "active" investments have a fund manager making informed decisions on how to invest the fund's money. One key point is that passive funds have a lower annual cost, simply because there is no fund manager with a research team to pay for.

What I do as an adviser is to aim for the best investment performance within the constraints a client has given me. Among other things that requires balancing the extra cost of active investing, versus the extra performance which you hope for.

The problems start when people who should know better tell you that active funds do not, on average, perform any better than the cheaper passive funds. That sort of brain dead reasoning is absolutely true but absolutely meaningless! The whole point is that passive funds in general give you "average" performance - that is what an index is! And therefore there will always be active funds which do better and those which do worse.

But if, with a little work and expertise, you can find an active fund which has a reasonable expectation of doing better than the equivalent passive fund (by more than the additional cost), then you are en route to out-performing that passive fund.

The argument put forward by the passive camp often seems to assume that an adviser or investor will simply use a pin to select some random active fund which may or may not do better than the index. For example, one adviser claims: "Only 21% of global equity funds have outperformed their [index] over the past 15 years". That may well be true, but through research and experience and periodic monitoring I would expect to have selected one of those 21% funds.

If an adviser is only offering to give their clients average investment performance that's fine, so long as they make that clear to clients. But my aim is to do better than average for my clients!

Having said that, there are some investment markets where it is very difficult to reliably do better than an index - US equities is one example. In that case, a passive fund is the most effective approach.

14 March 2019

Tax Changes Coming Up (April 2019)

New Tax Year, New Numbers
The annual Budget is of course the time when the Chancellor announces forthcoming changes. Assuming that his proposals are accepted by Parliament, they are then implemented at a later date - often from the beginning of a new tax year.

So here are some changes coming along this April.

Increased Personal Allowance 

A recent big announcement brought forward the date when the Personal Allowance increases to £12,500 (the previous big announcement!). You can receive that much income without paying Income Tax - although the National Insurance tax may still apply to employment income.

Inheritance Tax

No change to the basic Nil Rate Band (£325,000) but the "Residence Nil Rate Band" increases to £150,000 in April. This gives you an extra amount before IHT applies, provided certain conditions are met. Broadly speaking that means you are leaving your home to children.

Probate Fees

These have been fixed at £155 previously, but from April will be on a sliding scale based on the value of the estate. Up to £50,000 there is no fee, but for estates £500,000 - £1m (covering many people in the south who own a property) it will be £2,500. A massive increase!

Pension Lifetime Allowance

This is the maximum value pension assets that you can hold before their tax benefits start to be withdrawn. In April it rises with inflation to £1.055m. 

Auto-Enrolment Pension Increases

In line with previous legislation, employers and employees will have higher minimum contribution levels to staff pensions. (From a minimum of 5% total with 2% of that from the employer, to 8% total / 3% employer).

ISAs

Later in the tax year (November) the Help-to-Buy ISA scheme will be terminated for new applications (have a look at Lifetime ISAs instead.) The standard ISA allowance is unchanged at £20,000.


25 January 2019

Reasons to be Cheerful in 2019

There has been plenty for investors to worry about in 2018. What about 2019? Here's five things not to fear - according to Seven Investment Management.

1. A US Recession
The US is a major driver of global growth and some commentators fear a recession in 2019 which would be bad for us all. It is currently growing at 2.5% and Seven Investment Management say it would take at least 2 years for that to turn around into recession.

2. Trade Wars
Trade tariffs are bad for global growth. Only around 2.5% of worldwide imports are subject to that at present. And the expectation is that the US and China will see sense and reach a compromise that will not harm their economies too much.

3. The UK
Seven IM are confident that the Brexit shambles will eventually resolve into a deal with a broadly sensible outcome, which is not too painful for the UK.

4. A Corbyn Government
If Mr Corbyn comes to power, his bark will be severely curtailed by the range of views in his Labour party, by business pressures and economic restraints. He would be able to do little that would affect UK financial markets.

5. Volatility
Recent volatility has triggered alarmist headlines. While volatility has certainly increased, that is from the low levels seen in 2017. 2018 was much more at normal levels even though it may have felt bad, and 2019 is likely to continue that.

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