There have been calls in the press for Brits to “get the savings habit”: a habit that many of our parents had (or grandparents, depending how old you are, dear reader) but which we’ve lost along the way.

But if we decide to save, our next question might be “where do I invest my hard-won savings?”

That’s why I wrote recently that saving was a worthy thing to do; but that another option was to use any “discretionary income” we have, to pay down debt. As the saying goes (according to the Daily Telegraph): “Paying down debt … is the best tax-free, risk-free investment in town.”

There was more on this in a great piece yesterday (1 March 2013) by  Sean O’Grady of The Independent. It reminded me that I’d forgotten the “fun” aspect; that’s why shopping will for many of us be the most attractive option. His headline was “Shopping gets in the way of saving” and he says, even on the relatively mundane activity of food shopping:

“One of the most benign things that has happened to suburban Britain in the past 10 years or so has been the emergence of Tesco Metro, Sainsbury’s Local and the rest, which at least provide the option of a fresh apple or raw carrot in what used to be “food deserts”. For that alone, we should forgive them the horse-meat mistakes. As the current TV series chronicling the life of Mr Selfridge reminds us, we love shopping as a leisure activity in this country, and have done so for a very long time.

Contrast that with financial services. This is no one’s idea of fun. We know, instinctively, that providers of investments rip us off; annual charges, entry fees, financial advisers’ fees and all the rest of those little humiliating scams make us rightly suspicious of investing in even the soundest unit trust, investment trust, open-ended investment company, or whatever.”

O’Grady is right; no-one’s idea of fun. All those trip-wires he so graphically describes are indeed worrying.

So … “paying down debt remains the best tax-free, risk-free investment in town.” I rest my case.

PS You don’t have any debts? Good for you; but maybe you’re reading the wrong blog.

WANT TO KNOW MORE? Read my book!

A recent study by UK financial services company Scottish Widows says that many Brits don’t make any attempt to save for the future; many have no savings at all. Their message is clear; reintroducing the savings habits of earlier generations would be a prudent step for many people.

I won’t argue with that, with one exception. If you have significant debts, then paying down those debts is more prudent than building up savings, especially as those savings will earn tiny rates of interest compared with the interest you’re paying on your debts; and tax has to be paid on that interest anyway.

For more on this topic, see my earlier post of 27 Jan 2013.

Another view on the renting vs. buying debate has been published by the Halifax Building Society in the UK.

Martin Lewis of Money Saving Expert said recently on the BBC that too many people overstretch themselves in order to buy, sometimes settling for an interest-only mortgage (see my recent post on that aspect: LINK);  and he commented: “renting is not a dirty word.” However, according to Monday’s copy of The Independent’s budget edition the “i” (by “budget”, I mean 20 pence: that’s what we’re about on this site), the Halifax has published data showing that renting is more expensive than buying, by an average of £120 / month through the UK, with the largest difference (£193) in London.

The “i” report said: “Latest figures from Halifax show that buying a property in the UK is more affordable than renting.”

If I were a cynic, I’d say “the Halifax’s business depends on lending money for house purchases, so they would say that, wouldn’t they?” But I’m no more than averagely cynical, so I wonder what costs were included in the costs of ownership. So I shall investigate.

***

Investigation part 1: as you’ll see from the comments in the link below, the “cost of buying” probably (I’m not 100% sure) assumed a very low mortgage interest rate – around 2% is achievable now – but only if you have a very high deposit,  maybe 35-40% of the purchase price, which is out of the question for most people. Certainly out of the question for first time buyers; and that’s the group that would be most interested in the “shall I buy or shall I continue renting” debate.

Memo to self: “investigate further!”

WANT TO KNOW MORE?

For more on the Halifax report, click HERE.  It’s from a regional newspaper : I can’t find the report via the Halifax site.

Last week I quoted Martin Lewis, the “MoneySavingExpert”, who was talking on BBC Radio 5 Live on the renting vs. buying question. He said: “Renting is not a dirty word. People in this country think renting is throwing money away, but often if they can’t afford a repayment mortgage they get an interest-only mortgage. And they don’t consider that to be throwing money away!”

Now recent research from asset management data firm xit2, quoted in the London “Independent”, has shown that of 1.3 million interest-only mortgages set to mature by 2020, about one million do not have a repayment plan in place.

Mark Blackwell, MD of xit2, says: “If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite around 2020 when the big batch of high-LTV interest-only loans granted in the mid-2000s mature.

“Eighty per cent of these borrowers have no repayment plan. Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings. Many of these borrowers won’t be able to pay off their mortgage before it matures and will be stuck in arrears.”

But, it seems, only a few lenders are alerting borrowers to the looming financial calamity as their mortgage matures, being unable to remortgage and still owing a huge capital sum on a property that may even be worth less than they paid for it.

Advisers say those on interest-only mortgages should review their situation and, if necessary, take immediate action to lessen any financial hit. Philip Bray from investmentsense has seen a steady increase in the number of clients coming to him with a hefty interest-only mortgage hangover. He says: “First things first, consider moving to a capital repayment plan, and use other assets to repay the debt. You could downsize, and purchase a smaller property from the equity in their home – admittedly this isn’t an option open to all.”

If the borrower is near retirement – and the Financial Services Authority says many are – more drastic action may be necessary: “They could use the tax-free lump sum from their pension to repay, or pay down some of, the debt, accepting the fact that they will have a lower income in retirement.”

Want a copy of the whole article from the “Independent”? CLICK HERE

Could this affect you? If so, get in touch.

Here’s a good story, or at least a good recommendation, from my February copy of “Moneywise”. This one isn’t up on their website, so I’ll paraphrase it:

Their staff writer Hugh Morris suggests that after couples have had a romantic Valentine’s dinner last night, a dose of financial reality is a good hangover cure. His headline is “Discuss finances with your loved one.”

We are much better at this than in our parents’ day, when one partner (usually the husband) took care of the finances and didn’t really discuss money with the “better half”. However, we know that even today many couples don’t discuss these matters, with tragic results; many men commit suicide because of a debt crisis or a redundancy that they couldn’t bear to tell their wife or partner.

Morris says: (1) “Open Up”: be completely honest not just about current facts but about any nasty surprises that might be just around the corner. (2) “Budget Together” (self-explanatory); and (3) “Discuss the Future”, including the unpalatable fact that you will both die at some point. For example, if you are not married, (and especially if you are not married) do you both have up-to-date wills? And is your life insurance sufficient that one of you could live comfortably without the other; paying off the mortgage, for example?

The article is only half a page but worth a read. If you want the whole thing you’ll have to buy the magazine. From your friendly local newsagent!

WANT TO KNOW MORE?

Hugh Morris’s piece wasn’t on their site when I wrote this piece but you might find it’s there now: www.moneywise.co.uk

Yesterday I was at a seminar about people getting rich by buying multiple investment properties, totally on borrowed funds (I was only there because it was misrepresented and I couldn’t get out!). By contrast, today I heard a fascinating discussion on BBC Radio 5 Live about people who’re having problem buying one property, because they can’t get funding. And I became a big fan of their resident expert Martin Lewis (I also mentioned him in yesterday’s post), who is a regular contributor to the programme.

Here’s a paraphrase of just one conversation:

Text message from a listener: “I find it incredibly frustrating: I can’t get a mortgage because I can’t get a deposit together. So I have to rent privately, where I pay £650 / month, so I could clearly afford the mortgage, because I earn £32,000. The situation is ridiculous.”

Martin Lewis: “No, it’s not unreasonable that lenders ask for deposits. House prices fluctuate, so they don’t want to risk the whole of the purchase price.

“The expectation of entitlement to own your own property is part of the reason we got into the financial crisis. People were overstretching themselves in the rush to be on the ladder. I’ve talked to 20-year-olds who felt it was “so unfair” they couldn’t buy a property. I bought my first property at 33, which is old by today’s standards, but by then I was financially stable and wasn’t pushing to buy. Too many people nowadays think about the mortgage first and their financial situation second. What’s wrong with saving up for a deposit, so that your financial situation is stable before you buy?

“Renting is not a dirty word. People in this country think renting is throwing money away, but often if they can’t afford a repayment mortgage they get an interest-only mortgage. And they don’t consider that to be throwing money away!” 

I’ve also heard UK Business Secretary Vince Cable say that the culturally implied pressure to own our homes contributed to house prices becoming unsustainably high and thus contributed to the crash.

I have thought for a long time that our obsession with home-ownership at any cost has negative consequences; but now that a high-profile broadcast journalist / TV presenter and a Cabinet minister are saying similar things (and saying them better), maybe that will change attitudes.

I do realise however that this could be a minority view, so comments are welcomed.

WANT TO KNOW MORE?

Here’s a link to the programme’s webpage on the BBC iPlayer: http://www.bbc.co.uk/programmes/b01qlknk. The mortgage discussion began, with an item about current deals (low rates but high deposits needed and very high fees), at about 41 minutes in. The above response from Martin Lewis comes at 50 mins in.

Today I was at a seminar run by the Rich Dad Poor Dad Education group. I’d read a couple of books by Robert Kiyosaki, who started the company, and I wanted to hear their latest thinking.

I was disappointed to discover that the seminar was entirely about property investment, because I had no interest in that. However I decided to stay, partly because I’d have had to climb over ten people to get out. Anyway I know that one can always learn something useful. And I did.

The speaker talked about how to use zero percent credit cards (e.g. 0% interest for up to two years in some cases) as a way of funding the deposit on a property investment, and he made the point “this is virtually free money; yes, there’ll be a fee of around 3%; but as inflation is running around that figure, it’s free money in real terms.

That reminded me that Martin Lewis, the BBC’s famous “Money Saving Expert”, often talks about how to use zero interest cards to reduce the cost of servicing existing debt, so I checked his website for the latest deals. He did not disappoint me.

Here’s a link to that guide, which is updated regularly:

http://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards

Two warnings:

1. You need to be able to clear the balance on these cards before the free period runs out, or it changes form free money to very expensive money, i.e. the card provider’s “SVR”, (Standard Variable Rate), which in the UK could be up to 29%. (Although the bank base rate has been at an all-time low for years!)

2. Your credit history needs to be good enough to qualify for the balance transfer card, so this method will work better for debtors who’ve only recently got into problems. If you already have some defaults on your record, it might not work. If you’re not sure, check: on my blog last March I listed a ratings agency’s guidance on how to check and repair your credit record. Go to https://michaelmacmahon.com/2012/03/repair-your-credit-rating/

(Note: so far this news story has a UK focus. But beware; these pesky scammers will try to find a way to target you guys in the USA; in fact wherever you live!)

Financial scares, scams etc are never far from the news. Here’s the latest one, which I only heard about an hour ago on BBC Radio 4’s “Today” programme. It concerns pensions.

It turns out people are being targeted with phone calls and text messages asking if you’d like to ‘unlock’ (or maybe ‘liberate’) your pension. They say they can show you a way.

I stress that this doesn’t apply to the state pension but to others, such as company, occupational, private pensions etc, where the funds are normally locked up until you’re 55 or older, depending on how the scheme was set up.

Now in very exceptional circumstances, e.g. life-threatening illness, it can be advisable to find (legal) ways to get access to these funds earlier.

But the scammers are calculating that many people will be tempted simply because they are short of money. They swap the funds, then invest them, often in questionable schemes, often in places where the regulators can’t touch them. But that happens AFTER deducting charges and fees, which the UK’s pensions regulator described as nothing short of theft. According to the Radio 4 programme, these deductions and taxes can reduce the value of the fund by up to 50%; and what’s left could be in risky investments.

Some of the schemes promise that no tax is payable, but the UK’s FSA (Financial Services Authority) says: “Anyone who accesses money from their pension, either via a loan or other ways outside of the normal allowed methods, runs the risk of having to pay unauthorised payments charges. These can be up to 70% of the value of the loan.”

It’s the old story of “caveat emptor”, or in other words: “if something seems too good to be true, it generally is.”

… and finally: if you’re very short of funds and are tempted by one of these approaches, then consult one of the independent financial advice charities for advice; on how to find other ways to solve your problem. You’ll find a list of these organisations in the “Resources” section of my book “Back to the Black”, available from Amazon.

WANT TO KNOW MORE?

Here’s an audio link to the BBC story: to listen, scroll to 2hrs:46mins:30secs. (The clip is only 3 ½  minutes long) http://www.bbc.co.uk/programmes/b01qhqrq

Here are some links to official advice sites, if you get one of these approaches.

The UK’s Financial Services Authority (FSA):

http://www.fsa.gov.uk/pages/consumerinformation/product_news/pensions/pension_schemes.shtml

The UK’s Pensions Regulator: http://www.thepensionsregulator.gov.uk/regulate-and-enforce/pension-liberation.aspx

The Money Advice Service: https://www.moneyadviceservice.org.uk/en/articles/pension-release-or-pension-unlocking

… and if you want to report a doubtful approach you’ve had, go to http://www.actionfraud.police.uk/news?page=4