“We want to know how much we can borrow please?”

“Well how much do you want to spend?”

“We don’t know what prices to look at until we know how much we can borrow”

“Tell me how much you want to raise…” and so on

“We don’t know!”

While mortgage loans may still be capped at a certain multiple of your salary (for example, up to 5 times a single person’s salary, of 3.5 times a joint salary) this does vary between provider and will also depend on your individual circumstances. In practice, mortgage lenders (and therefore brokers) are most concerned about affordability.

That £150,000 loan would be just around £700/mth with interest rates at 3% (assuming a repayment mortgage over 25 years), but if rates shot up to 7% or even 9% it could almost double.

So, how to estimate how much you could get?

• Look at your reliable income and multiply it up between 3.5-5 times, just to get an idea of the range of values you could be looking at. For a £30,000 income that would mean a possible mortgage between £105,000 to £150,000.
• Be aware of your ‘status’ ie how provable your earnings are, how reliable they are for the future, how good your credit rating might be. All of these things may affect how much you’re actually lent.
• Go through your monthly budget, and work out how much you can afford to spend on your mortgage. Ensure you’ve taken into account any other regular repayments (loans, credit cards etc), and have left yourself enough to live on.
• Look at the chart below to see roughly what this could allow you to raise: for example if you think you can spend £1,000/mth on your mortgage – while technically that could allow you to repay a £200,000 loan at 3%, if rates went up you’d be a bit stuffed. However, you should be able to afford a £100,000 loan – even if rates increased to 9% - and possibly up to £150,000, as long as rates don’t rise too much. You can look at how much a loan would cost you at different interest rates on the Government’s Money Advice Service website. Check that this tallies with the income multiple range. Someone on £30,000 would be extremely unlikely to get a mortgage for £200,000 anyway (almost 7 times their income), so that rules that out.
• Once you’ve established a realistic range for a potential mortgage loan, then add in your deposit and see what that takes you to. In the example we’ve been using, an earner of £30,000, with a £20,000 deposit, could be looking at properties between £125,000 and £170,000 – though it might be more prudent to cap it at £150,000 – bearing in mind the costs of house buying and moving which’ll also need to be paid for. Unless you’re a first-time buyer, you’ll also need to pay stamp duty on any property worth more than £125,000 of at least 1% ie £1,250 and upwards.
• Then get searching, and try to refine your requirements as tightly as possible so you get a clearer idea of what you can get for your money.
• You may also be able to get a mortgage agreed ‘in principle’ to reassure you that you can get the money you want, and to put you in a good bargaining position when you finally find a property you like.

NB: this is a very top-level guide and your individual circumstances will dictate how much you will be able to borrow. And remember, your home may be repossessed if you do not keep up repayments on your mortgage. Now that wouldn’t be good. Err on the side of caution, please!

Maybe we’d all prefer to hand over a bit more of it in taxes, but in return be really reassured that our pensions, healthcare, schools and universities were all paid for. What do you think? Does he have a point?

childcare is probably more frustrating for men because nobody ever socialised us to look after children.

So this is our selection of some of the better cash ISAs out there as of the end of Feb 2011 for savers in different circumstances. Please note that the first 3 fixed-rate options all require you to put your money in at the start, but don’t allow you to top it up further down the line.

Highest rate of all for those who want to lock their money away: Northern Rock 5 Year Fixed Rate Cash ISA Issue 155: 4.3% AER

• Fixed rate for 5 years (until 15 Feb 2016). This is a long commitment, and in a couple of years’ time may not look all that attractive; but at least you know where you are and what you’re getting.
• Allows transfers in from old ISAs, as well as new ISA money.
• Needs initial deposit of £500 (and if the balance falls below £500, the interest rate plummets too).
• You can take your money out whenever you want, but you forfeit 180 days (6 mths) of interest payments.
• Limited edition offer, so you can only put money in at the start (so best if you have your full £5,100 investment available). Also you can’t keep topping it up year after year.

Highest fixed 3-year rate: Aldermore 3 Year Fixed Rate ISA: 4.01% AER

• Rate fixed for 3 years.
• Allows transfers in from old ISAs, as well as new ISA money.
• Initial deposit of £1,000 (and if balance falls below £1,000, interest rate falls too).
• You can take your money out whenever you want, but you forfeit 180 days (6 mths) of interest payments.
• Limited edition offer, and all investment and transfers have to be initiated within the first 10 business days of opening the account. No top-ups allowed.

Highest fixed 1-year rate: Northern Rock 1 Year Fixed Rate Cash ISA Issue 153: 3.05% AER (but see Santander deal below)

• Rate fixed until 15 Feb 2011.
• Allows transfers in from old ISAs, as well as new ISA money.
• Initial deposit of £500 (and if the balance falls below £500, the interest rate plummets too).
• You can take your money out whenever you want, but you forfeit 60 days (2 mths) of interest payments.
• Again, a limited edition offer, and more suitable if you have the full £5,100 available to invest immediately.

Highest variable 1-year rate (good if you might want to make some withdrawals): West Bromwich Building Society WeBSsave ISA: 2.88% AER 

• Includes a 1.12% bonus rate payable until 29 February 2012.
• Allows transfers in from old ISAs, as well as new ISA money.
• Initial deposit of £1,000 (and if the balance falls below £1,000, the interest rate reduces too). You can, however, continue to put money in on an ongoing basis (subject to the annual ISA limits).
• You can make up to 3 withdrawals each tax year (6 April – 5 April) without any penalty charge. On any more you’d forfeit 60 days (2 mths) of interest payments.

Highest variable 1-year rate with no minimum (so good for new money, regular savers, and withdrawers): Santander Flexible ISA: 3.15% AER

• Pays 2.65% above the Bank of England Base Rate (currently 0.5%) for 12 months. This is good if you think the Base Rate will rise over the next year.
• Does not allow transfers in, so only for new ISA money (but you can put in this year’s allowance, and then the next allowance in April).
• Minimum deposit of £1.
• Instant access, without penalty.

We’ve ignored ISAs run by banks that are not covered by the Financial Services Compensation Scheme, and those that require you to open up other accounts. But do always check with your existing bank just to make sure there’s no deal they can move you onto – Santander, Nationwide and Halifax / Bank of Scotland all have good offers for existing account holders at the moment.

And remember that if you’re transferring money already in an ISA, DO NOT take it out of the bank (which will count as a withdrawal), but rather request the new ISA provider to transfer it for you. This way the money stays wrapped up tax-free, nice and cosy.

* Bear in mind that that ’4%’ rate of inflation is the general rate at which the price of a defined basket of ‘goods and services’ has increased over the past year. In actual fact, depending on your circumstances, lifestyle and consumption (ie what you spend your money on), everyone will experience their own individual inflation rate.

** £1,500, just in case you’re struggling.

In actual fact, most of our clients don’t have property empires as such, but rather second homes which they once lived in, and are now renting out (usually because they’ve begun (gasp!) co-habiting). Although most people have got to grips with the fact that if you sell the home you live in, you don’t usually have to pay tax on any capital gains, how this treatment applies to once-lived-in-and-now-rented property is a bit more obscure. Specifically there are a number of ‘reliefs’ you can claim to reduce the amount of profit you have to pay tax on, and a special ’3-year’ period. So, taking a hypothetical flat-owner ‘Annabel’, these are the things to think about, and a sample calculation to show how tax might be worked out.

Assumptions:

• Annabel bought a flat 10 years ago for £100,000. She lived in it for 4 years, and then, after moving in with her partner, began renting it out (that’ll be 6 years renting then).
• The flat’s now worth £175,000 (nice work if you can get it).
• She’s now decided to sell the flat to raise money towards a deposit for a joint property, but is not sure if she’ll have a big capital gains tax bill to pay. She thinks the tax rate is 40%.
• She earns about £30,000 and so is a basic-rate tax payer.
• A back of the envelope calculation suggested she’d have to pay a bill of about £30,000 (ie profit of £75,000 x 40%). This is wrong!

The key steps to run through are:

• Reducing the profit made: Annabel’s profit is basically £75,000 (£175,000 – £100,000). But she can also take into account the costs of her buying and selling the flat, as well as any money she has invested in big works on the property (such as a loft extension). Let’s say she’s put an additional £20,000 into the flat in costs and building work: that reduces her profit (or ‘capital gain’) to £55,000 (£75,000 – £25,000).
• 1) Claiming Private Residence Relief: Annabel owned the flat for 10 years. The tax man assumes that the last 3 years qualify for Private Residence Relief (PRR), if she’s lived there AT ANY TIME. She does not have to move back in before she sells. She can also claim PRR for the first 4 years, when she was actually living there. So for 7 (3+4) out of the 10 years of ownership – or 70% – Annabel qualifies for PRR. That means she does not have to pay tax on 70% of the gain.
• 2) Claiming Letting Relief: As the flat was being rented out for the rest of the time when Annabel wasn’t living there (6 years out of 10, or 60% of the time), she can claim ‘Letting Relief’, which is: the lowest of: a) £40,000; OR b) the amount of Private Residence Relief due; OR c) the amount of gain she’s made on the let part of the property. In this example, the amount of PRR she’s getting is £38,500 (£55,000 x 70%), and the amount of gain made on the let part of the property is £33,000 (£55,000 x 60%). Both are lower than £40,000 – and so as the lowest, the £33,000 figure applies – basically cancelling out any tax due.
• Using your annual capital gains allowance: If there had been still a capital gain due, Annabel would then have been able to subtract any unused capital gains allowance for the year, which for 2010/11 is £10,100.
• Paying tax at the right rate: This is currently (tax year 2010/11) 18% for basic rate taxpayers, and 28% for higher rate taxpayers. If you’re on the cusp between the two rates, you may find yourself having to pay some at 18% and some at 28%.

Sample calculation:

IMPORTANT POINTS!

• Letting Relief does NOT apply for rented properties you’ve bought on a buy-to-let basis; you have to have lived in the property as your home in order to qualify.
• As time goes by, the proportion of time over which the flat is rented obviously increases, and the amount of PRR you get decreases – so the longer you hold on to your property, the  higher the chance is of a CGT liability.
• Annabel may, or may not, have a mortgage on this flat. For the purposes of capital gains tax calculations, A MORTGAGE OR LOAN ON THE PROPERTY IS IRRELEVANT.
• See more on the tax man’s website here (CGT on your own home) and its PRR factsheet here.

And that’s enough capital letters and bold for today. Any questions, drop us a line.

Personal finance writers love to preach the benefits of cutting back on daily hedonistic expenditures – the overpriced latte, the breakfast croissant. But the most efficient way to save money, obviously, is to cut out big expenditures, not small ones. And if small pleasures deliver a reliable daily mood boost, they may be better value, in terms of their cost-to-happiness ratio, than more pricey occasional purchases such as gadgets or clothes. It’s all too easy to mistake the daily feeling of self-denial for the idea that you’re making significant savings, when in truth the two may not be closely related. 

As someone whose happiest days have started with a Pret almond croissant, I completely vouch for this. Although it never hurts to get on top of your finances and work out what gets spent where; that should not mean embarking on a life of deprivation and misery. Keep feeding that soul, if only with a muffin. And if you want to talk budgets, brush away the crumbs and drop us a line. They’re not incompatible. After all…

… people suffer short-term regret when they choose pleasure over work, but once a few years have passed, the situation flips: looking back over the years, people tend to feel far more regret at passed-up opportunities for pleasure, not work.

Think about it.

And in this current climate of awful interest rates, it’s even more important than ever to really understand what’s on offer, and to compare like-with-like.

From time to time stellar interest rates are announced on regular savings accounts; but don’t be fooled. They can be good, but hold the cigar.

For example, First Direct are currently promoting a ‘Regular Saving Account’ that offers “8% AER*/gross fixed for 12 months“. You can put in between £25-£300/mth (actually the maximum limit increases monthly in units of £300)**, but that’s the principle - the maximum you could contribute would be £3,600.

• If you were to put £3,600 into an account paying annual interest of 8%, you’d earn a lovely £289 each year (as well as being the envy of all your friends).
• But because you can only put in a limited amount each month, only the first £300 you submit will earn 8%. The next month’s savings will earn a bit less as they only have 11 months to earn interest, and the month after that only 10 months … and so on.
• The final £300 you put in will actually earn about 0.6% interest on the month it’s in the account (ie £2).
• So in practice, if you assiduously put in £300/mth as soon as you can, you’d actually get back about £156 in interest.
• Which in reality is a gross rate of 4.33% …

This is still higher (just) than anything else currently available for a one-year savings account, but not of the ‘shout it from the rooftops’ level.

That 8% AER headline shows you what the gross rate would be if interest was paid and compounded each year. And it’s correct, but the contribution limits mean that you’re not getting that full year’s benefit on all of your money. So be aware.

On the other side of the coin, AER numbers also allow you to compare accounts that pay and compound interest at different times. They can help you understand that, for example, an account that pays interest every month may actually give you a better return than one that pays interest just once a year, even if the second one might pay a higher interest rate. For more info see this Guardian factsheet.

* AER stands for ‘Annual Equivalent Rate’

** Various other terms and conditions apply (of course)

We could recommend you jump ahead of yourself, and start tackling all those New Year’s financial resolutions that we told you about last January, but if that’s a bit too dry for this age of austerity, here’s a selection of top tips to tackling the Christmas season:

• Be realistic: everyone’s in the same boat, and actually might quite welcome an agreed budget limit / veto on presents. This American article from 2009 highlights the issue of overspending to compensate for other areas in your relationships…, a concept which we suspect strikes a chord…, while MoneySavingExpert Martin Lewis offers a ‘no unnecessary presents’ email service.
• Contrary to the usual advice, DO SHOP FOR YOURSELF (at least window shop), then tell people if there are things you actually want; give everyone three options of things you’d like, and hopefully they’ll retain the ability to surprise you (a bit), while you’ll be pleasingly gratified.
• Get baking: many Christmas budget guides sing the praises of homemade chutneys, biscuits and sundry other comestibles. Yum yum. But DIY presents can also extend to services (whether it’s IOUs for car cleaning, babysitting, or weekly telephone calls…), and you can print out ‘gift of time’ certificates or make your own, to set it in stone.
• Go for something small but different: we love museum shops such as the V&A, or NotOnTheHighStreet for great personalised ideas.
• If you’re regularly buying online, sign up to a cashback website to make the most of your spend. Our favourite is KidStart, which puts money aside from your purchases to go into a child’s bank or child trust fund account. Just remember to click through from it first!
• Once it’s all over, tot up how much you’ve spent, divide it by 11, and put that amount aside each month next year so when next Christmas comes you’re sorted… (and if you need to know how long you’ve got, you can download a Christmas Countdown clock)…

Enjoy!

• You can set up a ‘general power of attorney’ to give someone the right to handle your affairs, for example if you’re moving abroad for a period of time. Critically, though, this becomes invalid if you become mentally incapable. This is in contrast to the…
• ‘Lasting power of attorney’, which usually comes into force only when/if you become mentally incapable of making your own decisions. It’s this that most people I meet are thinking of. It comes in two flavours: one covering your property and financial affairs, and the other concerning your health and welfare.

Key points to note about setting up a lasting power of attorney (in England & Wales*):

• You can go to a solicitor, buy an off-the shelf power of attorney kit, or download forms and clear guidance directly from the Office of the Public Guardian (OPG). In all cases, nothing is valid until it has been registered with the OPG.
• OPG registration currently costs £120 for each Lasting Power of Attorney (so £240 if you’re doing both). Exemptions are available.
• Attorneys can be anyone you trust to make the right decisions on your behalf, from your spouse or children to friends, solicitors, or ‘others’.
• If you’ve chosen more than one attorney, then you need to decide if you want them to have the power to make decisions independently (“severally”), or to have to work and agree together on all matters. The OPG gives as an example:

 My attorneys must act jointly in relation to decisions about selling my house, and may act jointly and severally for everything else.

• Setting up a lasting power of attorney doesn’t mean you’ve signed everything away forever: it should only be used on the occasions that you’re mentally incapable of making a decision. For example, it may be needed if you develop dementia and you need help to move into a home, to ensure the best decisions are made. But you’d still potentially be able to make your own decisions in all other aspects of your life: it’s not all or nothing. And only when the OPG is contacted and the LPA is ‘activated’ does it have any power.
• However, while the health and welfare LPA can only be used once you have lost mental capacity; the property and financial affairs LPA may be activated while you are still in sound mind (but just not managing to keep on top of your finances). You can restrict this so it’s only valid once you’ve officially lost mental capacity (we all have fears of errant relations defrauding helpless OAPs)…, and again you can place additional conditions:

My attorneys must not make any investments without seeking professional advice; [and/or]

My attorneys must not sell my home unless, in my doctor’s opinion, I can no longer live independently.

• The LPA forms have space for you to give guidance to your attorneys on your preferences, for example your wishes on different medical treatments, or favourite care workers.
• The forms also suggest you nominate people to be told when the LPA is set up (this is to prevent challenges or issues in the future).
• Finally, you’ll need to have the forms certified by a ‘certificate provider’: someone unrelated to you, who has known you for at least two years, and can confirm that you have not been pressurised into creating the LPA.

The OPG does provide very helpful guidance to completing the forms. If you’re committed to sorting out your affairs, both now and for the future, we’d wholeheartedly recommend you get LPAs set up.

If you’re concerned about someone else’s decision making capability (and we don’t mean just how your partner decides to stack the dishwasher), but they don’t have an LPA in place, you can apply to the Court of Protection who may appoint you as a Deputy to manage some or all of their affairs. Again, the OPG website holds more information about this.

* In Scotland, a similar process is run through the OPG (Scotland); and in Northern Ireland ‘enduring powers of attorney’ (EPAs) are still used. EPAs were the processes used in England and Wales before October 2007. If you have an enduring power of attorney in place, it is still valid, but only across property and financial affairs – not your health and welfare.

So they were withdrawn from sale, and now if you look on the NS&I website, you’ll find that out of 12 ‘products’ they sell, five are not for sale. The poor index-linked savings certificates have been joined by Guaranteed Equity, Income and Growth bonds.

OK, so no new customers are able to buy them. But what about ones who already hold the bonds, and are seeing them coming up to maturity (the end of their term)? Typically one of the benefits of these savings products was that you could just roll them over into the latest version of the bond.

Today I got a letter from NS&I clarifying that this is still possible, but the details are so hard to find on their website that they’ve had to send out letters telling us where to look (it’s in the ‘historical interest rates’ section)… In short, you CAN rollover into a new bond of the same term, and these are the gross taxable interest rates on offer:

• For Guaranteed Income bonds: from 1.5% (6mth term) to 3.8% (5yr term)
• For Guaranteed Growth bonds: 1.55% (6mth term) to 3.9% (5yr term).

Needless to say, they’re not the most compelling rates available (that’s the point), but they do exist and if you want to keep your savings with these NS&I bonds, you can.

NB: This does NOT apply to maturing Guaranteed Equity Bonds which are invested in the UK stock market; a quick phone call this afternoon confirmed that once those bonds have matured, if there are no new bonds available (like now), that’s it. Obviously if this has happened and you’re now sitting on a bunch of cash, and wondering what to do with it, do drop us a line.

Now is not the time to be putting it under the mattress!

The figures show that it is particularly important to shop around if you have built up money in more than one personal pension plan. If you have got multiple “pots,” you can often obtain a significantly better retirement income by combining your different pensions into one fund, which means you only pay one administration fee. By contrast, for very large funds – £500,000-plus – it can be better to split the money between more than one annuity provider to get the best rate.

We wanted to check this out, so got a series of quotes from a range of different annuity providers across the market, based on a level income for a woman (non-smoking, good health) aged 65. Across the bottom of the chart is the size of her pension pot, and the axis on the left shows how much, in percentage terms, she might be able to get for her money. While it’s very clear that more money = a better rate (which is what the Guardian article stated), we also found clear trigger points at which the rates improved: between £10,000 and £15,000; between £40,000 and 50,000; and over £500,000.

In the last case, it was because the best quote came from an annuity provider who only took on funds worth over half a million: if you fall into this happy camp, you definitely need to find out if consolidation or splitting the funds would be the best bet.

While this is only an illustration (and see our earlier post for details of how your annuity income can vary depending on your health and other circumstances), it reinforces the more general point that the more you can save towards retirement, the better off you can be. End of lecture!