Personal Finance



It is the time of you to review our successes, challenges, and progress made. It is perfect timing, then, to suggest my top 10 points of ‘Best Practice’ to ensure that you have a good 2010 in Personal Financial Planning terms.

Insurance

Do you have financial dependents?
If yes, do you have enough life cover for them to get by in the event of your untimely and premature demise? Do you have existing policies?
Can they be topped-up?
Are you paying too much?
(As premiums have decreased in the last few years) Were you a Smoker when you took the policy out and have now given up for over a year?
(You may attract non-Smoker rates if you let the insurer know) Etc., etc.

Critical Illness & Income Protection Insurances

You are statistically a lot more likely to suffer a Critical Illness or prolonged illness than die before, say, 65 years of age. Why, oh why, then do people not insure against these possibilities?! Prohibitive cost is a barrier I come across, but you would be surprised how much cover you can get for a few pounds a month. After all, better to have a few thousand pounds in the event of a negative event such as serious illness, rather none at all? Quality is the by-word in terms of choosing a Critical Illness and/or Income Protection Insurance. An Independent Financial Adviser (IFA) could come in handy here.

Personal Financial Budget

Personal Financial Budget is nothing but a financial blueprint. Just as the blueprint would guide the builder and help him forecast the end results, the personal financial budget is mandatory in planning for the future and gathering financial security, independence and wealth. The personal financial budget not only plans money that comes in and money that goes but also keeps track of spending avoiding thereby to fall in the debt trap.

There are six steps of creating a personal financial budget:

* One should determine his disposable income i.e. Income minus the deductibles like income taxes, union dues, pensions etc. the resulting figure can be written on a paper as value A. this calculation is not that easy. One may be paid more than once in a month. In that case proper calculation of the monthly salary should be made. The other sources of income like alimony, interest payment and child support should be included.

* One should list the fixed and variable monthly expenses. Expenses in utilities should be broken down into expenses in electricity , gas and water. Appropriate amount of funds should be allocated for clothing, medical care,child care, personal expenses, recreation. A contingency fund should always be maintained in case of emergencies. Annual, quarterly and semi annual expenses should be split to obtain a monthly figure which can be used to pay for the bills that are pending. All such expenses should be added up and named value B.

* Next the discretionary income should be calculated which is the total income less the total expenses i.e. Value A-Value B. this difference will be named as value C.

* Next , one should list all monthly debts like credit card bills and other monthly payments. This value should be named as value D.

* In this step one should find out whether there is any remaining discretionary income after deducting value D from value C. in case this value is negative then there is no point going to the next step but instead consult a personal financial advisor.

* In the next step one should list in the short term, long term and undesired goals. The long term goals include, real estate purchases, investment for future education and retirement investments. Short term goals include investments for house renovation,new car, and travel. The other investments are in stocks, bonds, Mutual Funds. After determining these goals one must calculate how much he needs to save monthly to satisfy these goals after splitting the money required to satisfy each goal.

Nowadays formulating the personal financial budget has been made easy by the use of budgeting software's available in the internet.

Savings & Investment



A veritable smorgasbord of information! Ever wondered about ISA's, Savings accounts, the current rates of tax, top-performing funds, how to order ISA brochures, and how investment fund charges could affect your investment?

Savings Guide

Saving is easier said than done, but if you can eke some of your disposable income into a good account, it could help greatly to many different ends/goals. These could be savings goals such as this or next year's holiday (short-term), that shiny new sports car in 5 years time (medium-term), or providing your child with money to pay for a University education in 15 years time (long-term).

Goals aside, Financial Advisers tend to advocate 'rainy day' monies being stored for unexpected events/circumstances anyhow i.e. redundancy or ill-health. As a rule-of-thumb, they recommend this ideal emergency fund to be in the region of 3 to 6 months net salary.

Mortgages



A Mortgage area packed with information. Whether you would like to gain a basic knowledge or delve a little deeper, we hope there is something for anyone with Mortgages in mind. Feedback, constructive suggestions, and improvements you would like to see made to lse’s Mortgage section are welcomed!



A mortgage is a product that most of us will come across and need at some point in our adult lives. Essentially, a mortgage is a loan taken out to purchase a property, secured on that property i.e. the lender can re-possess the property if the mortgage payments are not made.

It is important to make 3 clear distinctions that pervade lse.co.uk’s Mortgage area:

* A Mortgage payment type refers to how a mortgage is repaid, either Capital Repayment or Interest-only.
* A Mortgage product type refers to Fixed rate, Tracker rate, etc.
* A type of borrower refers to the acclimatisation of borrower i.e. Re-mortgage, Adverse Credit, First-time buyer, etc.

What are the Mortgage payment types?

Capital Repayment: Where the monthly payment is part-interest/part-capital repayment. Initially, more of the payment will be interest, but this balance will move the other way as the Mortgage term wears on. Generally, where payments are all met on time, the mortgage balance will reduce to £0 by the end of the term.

Interest-only: As the terms suggests, where only Interest is paid to the lender, thus leaving the capital balance untouched. In this instance, a repayment vehicle is usually put in place, i.e. an ISA or Endowment, to repay the capital borrowed. Of course, it is vital this vehicle is reviewed regularly to ensure it has the best chance of reaching its target.

A variation on this theme is the Pension Mortgage, where the tax-free lump-sum derived from a Pension is used to repay the mortgage. Some would argue this to be too risky, thus being rarely used nowadays.

What are the Mortgage product types?
Variable rate: The lender’s standard rate of interest, typically around 2% to 2.5% higher than the Bank of England’s (BoE) ‘Base’ rate of interest, currently 5% (Writing this on 19th May 2008). It does not need to ‘follow’ the Base rate. This is not a preferential product, usually not attracting repayment penalties within a certain period.

Tracker rate: Funnily enough, this ‘tracks’ the Base rate! If the BoE increases or decreases the Base rate (usually by 0.25% or 25 ‘basis points’ at a time), this type of loan must follow suit. As an example, a lender might have a product that is ‘Base +0.5%’, so with a Base rate of 5%, the borrower would pay 5.5%, but this could/will change along with Base rate changes.

Discount rate: Similar to a Tracker in the sense that the rate follows an interest rate, being the Mortgage lender’s variable rate in this instance. Unlike a Tracker, however, the lender does not have to change their variable rate as a result of Base rate changes, thus a decrease in the Base rate may not feed through to (fully) benefit a borrower with a Discount product, perhaps the lender only dropping their variable rate by 0.15% after a 0.25% Base rate decrease. Whereas Tracker product quote ‘Base +x%’, Discount products are ‘Variable rate –x% i.e. the lender’s variable rate is 7.25% and they discount this by 1.75%, giving a pay-rate of 5.5%.

Fixed rate: A product where the interest rate and monthly payment remains stable, helping with budgeting. Common durations for Fixed rate Mortgage products (and Discount/Trackers for that matter) are 2, 3 and 5 years, although longer periods are available.

Offset: Where an account, usually Current or Savings, is run alongside the Mortgage. The balance of this account either lessens the monthly payment by ’offsetting’ (effectively reducing) the mortgage balance by the amount in the current/savings account, or increases the speed at which the mortgage is repaid if you keep the monthly payment the same.

What types of borrower are there?
Some categories listed below cross over. For example, you could have a Next-time buyer who needs a Self-certification mortgage, thus straddling both categories.

Prime: A term to describe the mortgage a borrower with a spotless credit history can expect to be eligible for, all other requirements, i.e. income, being met.

First-time buyer: Again, a descriptive title for a person(s) entering into the purchase of their first home.

Next-time buyer or Home-mover: A person(s) moving home by purchasing a new one, whether it be the first time they have moved or the 10th!

Re-mortgage: Where someone decides to remain in their existing property, but change lenders, perhaps because they can achieve a better interest rate or more appropriate product for their circumstances at that particular point.

Further Advance: The borrowing of further monies from an existing lender, perhaps for home improvements, debt consolidation, etc. Sometimes, borrowers choose to borrow more when re-mortgaging (see above), thus not being a Further Advance, but having the same effect.

Second charge/Secured loan: If a borrower cannot gain extra monies from their existing lender, they may seek to borrow from a lender specialising in ‘second charges’, where they are happy to take the second call on a property were the borrow to enter in default, not having maintained their monthly Mortgage/loan payments.

Fast-track: In recent times. Some lenders have introduced this type of mortgage for those that appear to be a good ‘risk’ to them i.e. stable employment, a good deal of equity in their property, etc. It simply means that most applications, perhaps 8 or 9 out of 10, of this ilk will pass through underwriting with no further questions asked. Naturally, this speeds up the mortgage application process. Lenders appear happier to offer a Fast-track mortgage for re-mortgage borrowers.

Self-certification: Where a person cannot prove their income in a traditional manner such as through certified recent accounts i.e. a seasonal business or cash-in-hand. The lender allows the borrower to effectively ‘sign-off’ the amount of income they earn. Naturally, if a Mortgage Adviser advises on the mortgage, it is their responsibility too to ensure the application is not fraudulent. The lender can still ask for Accountants details and seek a reference from them.

Adverse credit: Also known as ‘Sub-prime’, this type of borrower has had a poor credit history, to whatever degree. The history can be missed or late mortgage or credit card payments for instance. The worse the history, the worse the grading i.e. ‘Heavy Adverse’. Much the same as for Self-certification, the lender is likely to loan less of the property’s value (Loan-to-value percentage) and therefore ask for a higher deposit/equity than a ‘Prime’ mortgage, where the borrower has a satisfactory credit history and proof of income.

Commercial: As the term suggests, this usually means borrowing to purchase commercial/industrial property i.e. office or factory. These mortgages are unregulated.

Buy-to-let: Where an investor takes out a mortgage to buy a property to rent out. Higher deposits and a suitable amount of potential rental income from the property to service the loan needs to be evident here. When a property is more than 40% occupied by family members as tenants, the mortgage becomes ‘regulated’, similar to most other mortgages nowadays.

Foreign: Exactly as it suggests, gaining a mortgage on a property in a different country. There are sometimes extremely strange associated costs, rules and legal customs that pervade in other countries – something to be careful about. Equity release: Mainly for the over 60’s, this can help provide monies/income for those with reduced income in retirement, releasing money from the equity in their residential property. This loan will be repaid from the property owner’s estate proceeds on their death. This is the type of product that led to the acronym ‘Skiing’, meaning ‘Spending the kids inheritance’!

Personal loans/Credit cards




Personal loans are offered by many institutions from Banks to Supermarkets nowadays. They generally run along the same lines as a mortgage, but without the need for securing the loan on your property, usually being for sums of £25,000 or less over a term of 7 years or less.

In recent times, interest rates have not been too far off of mortgage rates, perhaps 1% above. Quite a few loan providers have tiered rates for differing levels of creditworthiness amongst their customers, charging a better rate for those with terrific credit management histories.