Interest only mortgage – Do you feel lucky, punk? Well, do you?

Monevator has a good post about using an interest-only mortgage as an investment tool. You have to live somewhere, and if you have the discipline then it’s a great way to build up an investment portfolio over the term of the mortgage which will pay off the capital.

Hey, where did I hear that before? Ah yes, as a late-twenties starry-eyed young pup in the market for his first mortgage. Abbey National’s estate agents at the time, Cornerstone, sold me a mortgage. I went in wanting a repayment mortgage, like my Mum and Dad used to have. Lovely LAUTRO saleswoman, Sue she was called, gorgeous green eyes…

“You can do better than that. with an endowment you just pay the interest, but look at this Friends Provident with profits fund. Look at these lovely growth figures. At the end of your 25 years you’ll have twice as much in the endowment as you’ll need to pay off the capital”

Sucker. I was had. These were the years of Gordon Gekko, Greed is Good. Beware pretty saleswomen promising the earth. I was single, so the one benefit of an endowment, the life insurance part, was worthless to me or anyone I cared about. But 100% profit in 25 years, well, that had me. That’s the takeaway message I got, I am sure somewhere in the fine print there was the usual past history is no guarantee yadda yadda. But I was lost to the green eyes and the promise of lots of moolah. I hope it was the moolah that swung it rather than the eyes…

A few years later, the house underwater on the mortgage, Friends Provident demutualised and I got seven grand. Which, having gotten wiser, I paid down to the capital. On the principle that there were now nasty shareholders rather than cuddly mutuals so I would be ripped off and enjoy poorer with profits performance, so I better at least use it to reduce my interest payments.

Then the letters came saying “sorry old chap, but we were a tad overoptimistic in our predictions it seems. You, mate, will be lucky to get half towards your capital, so you better raise the amount you’re putting into our rotten with profits fund to catch up. Ta-ra”. Or words to that effect. I saw red and wrote the MD of Friends Provident a stinking letter telling him their salesperson had promised me a guaranteed return. He, or rather some lowly grunt on his behalf, wrote back after a while saying “no we didn’t, but you can moan to us, then the Ombudsman if you like”

So it was that after moving I ended up with an interest only flexible mortgage from those nice people at Birmingham Midshires. Nobody wanted to sell me a repayment mortgage in those heady days of the dotcom boom.Every year I’d pay off a lump I’d saved to reduce the capital.

Some lengthy time later, Friends Provident settled with me to put me back in the position I would have been had if I’d taken a repayment mortgage, which was sixteen big ones they’d lost me in ten years. I paid this towards the capital of the new house. No foreign holidays, kitchen refits or cars were involved here ūüôā Having screwed up royally in the dotcom boom I learned, do not churn, sit on your hands, and continued to pay down the mortgage. From 2003 I changed tack, and started investing in a dead boring Legal & General tracker fund, using some of the money I’d otherwise be putting into the mortgage capital repayments. That did help me steal a march on the mortgage, and it 2006 I reduced the mortgage to the minimum BM would allow me to have. This was a flexible mortgage, so I could ring them up, and they would transfer to me any amount from 10k up to my overpayment into my bank account by BACS.

People often advocate an offset mortgage, where your savings with an institution are offset against your mortgage, so if you have a mortgage of 100k and savings of 50k you only pay interest on 50k. That sounds great, except in the credit crunch. Because the small print says they can forcibly use your savings to pay down some of the mortgage. So the general rule is never hold your stash of cash with the same organisation or banking group that holds your mortgage. This happened to someone I know, which screwed them royally.

I liked the disconnect of the flexible mortgage. Although I used shares ISAs to save my capital (effectively doing myself what Friends Provident had so miserably failed to do on my behalf) I never tackled this with the intent and savvy that Monevator proposes. But I can vouch that it works, I paid my mortgage down with about 10 years left to run. And paid the mortgage company¬† less than a tenner a month while I mulled over whether I wanted to discharge it. Monevator would make a good case that I shouldn’t have, I could have invested in 2008 and made a mint, and indeed could have had 11 years more use of this cash, currently at rock-bottom rates. But I don’t have his edge and ambition, and in the end I wanted my house to be truly mine.

2007 mortgage  statement.
2007 mortgage statement. BM didn’t get fat off my back that year ūüôā

the pros and cons of cycling to work

It’s easy enough to calculate how much money cycling to work saves me. I’m a civilian cyclist, not one of the hard nuts in Lycra and sinews like steel cables. It’s apparently called utility cycling.

Biking to work scores as an experience compared to driving if it isn’t raining, particularly at this time of year.¬† I get to hear the birds, indeed cycling regularly I get to even know some of them blackbirds individually by song.

I hear the high-pitched excitement of the nestlings as Dad comes to the nest bearing food, and the sparrows get up a racket in the hedge because it’s just what they do at this time of year.

Another plus is that a bike journey is very repeatable in duration. My journey time varies by less than a couple of minutes a day, probably from the one set of lights.

I had hoped that cycling might help me lose weight. I am someone who hated sports at school, and despise exercise unless it does something useful for me. Walking for the sake of it? Nah. Walking a few miles to go see something interesting or to shoot pictures in an interesting landscape, now we’re talking… Thus working out how to avoid the cost of a gym subscription has never been a problem for me. I don’t see the difficulty, pay good money to smell stale sweat and ache afterwards, what’s to like about that ūüôā

The nasty little secret is that biking doesn’t do that much in terms of calorie consumption. Not the way I do it. I average 8-10 mph over a distance of 13 miles round trip. These guys reckon I use about 260 calories each way with leisure cycling, which I find hard to believe. That’s about a Mars bar a day each way, not that I eat rubbish like that any more. However, according to this post, I would use somewhat less than half that just sitting at my office desk, so the difference is a marginal 300 calories.

Whatever the reason, leisure cycling makes precious little difference. There’s only one way to lose weight and we all know what it is. You don’t need to pay anybody for a fancy diet plan or crap like that, just knuckle down and eat less. It works well enough for me but it takes months.

There’s no point in cycling like a nutcase because the time I save en route would be wiped out and then some by the time it takes to shower and change at work, and the experience would be worse so I wouldn’t keep it up.

For the keener cyclist there’s another financial incentive. It costs an outrageous amount of money to knock a couple of pounds in weight off a bike, going to titanium bits and bobs. Knock a couple of pounds off the rider does the same thing to your ride, costs nothing and won’t get nicked with the bike either!

That’s not to say cycling has no physical benefits. It does improve my fitness and stamina, and makes hiking easier.

Somewhere it all went wrong. We was robbed – you and me and everyone else

A last look at our unscarred friendly skies before flights resume

The recent hoo-hah over the flight ban caused by Eyjafjallajökull makes me wonder. As a kid in the 1970s I remember being told that the future would be a relaxed one of more leisure time, a three or four day work week and the chance to pursue our visions and dreams. The grunt work of keeping the economy going would be done by robots doing our every whim. It all seemed possible then, that the advances in technology would serve us all.

Somewhere along the way we all took a left when we should have taken a right. Why exactly is it that so many of us are working in crap jobs, in hock to the Man for our mortgages and dreams, and we live for two weeks abroad? Two weeks of escape, versus forty weeks of quiet desperation. Where did we sign on for that, how can we get off? In the past it was possible to raise a family with the income from one man’s wage. Now a typical family needs both adults working to service the mortgage. What happened to the promise of a shorter working week? The current two day weekend was only introduced in the 20th century, a change from the old Sunday off pattern for agricultural workers. Imagine the bleating from the ‘business community’ if we tried to take out another day.

I feel for all the poor folk stiffed by Fate this last few days. But isn’t this all a wake-up call, is it really worth packing ourselves like sardines to be abused by so-called low cost airlines for 10 days of escapism which doesn’t always turn out all it’s cracked up to be? Travelling is rarely improved by haste.

What I want is more time, to travel slowly and overland, not have to pack my experience of other worlds into two weeks mandated by the desires of some corporation. I want to taste the food and feel the plains of Europe slowly give way to the mountain ranges, to follow great rivers from the sea to the source. I want to do it over weeks, not hours, and do it well.

Somewhere in the three decades since that dream of a longer weekend was sold me and now, something went wrong. We collectively bought into the false dream that Stuff would give our world meaning, and joined the wild merry-go-round of buying more and more of less and less.

Somewhere in these friendly skies unscarred by the vapour trails there is a reminder that it doesn’t have to be this way. We’ve done without air travel for a few days. Nobody has died, and all the inconvenience has been because of the unexpected nature of the shutdown. Air travel is nice, but it isn’t essential.

Maybe it’s time to charge it for the external costs it imposes on the rest of us. Tax fuel at the same rate as other transportation. Charge it for the loss of the quiet times and the uglification of our soundscape and our skies. Ban all night flights between 11pm and 6am, so that the Many can get some sleep at the expense of the Few that are in such a damned hurry. Air travel has gotten away with too much for too long, externalising its costs in terms of noise and nastiness. But most of all, perhaps we should ask ourselves why it is that we put up with this enervating haste, for so little return in terms of quality of life? Why are we rushing around so much, if it doesn’t seem to make us happier?

Dogs of the FTSE 100 – chasing yield

miscellaneous mutt image
Not this sort of dog!

As someone looking for an income from my capital assets, I am going for dividend yield in my shareholdings. There’s no rule that I have to get an income from dividends rather than growth, but realising an income from growth means selling itsy-bitsy numbers of shares.

The majority of my holdings are in the L&G Global 50:50 fund because that’s one of the three funds I can save AVCs in and I was able to save half last year’s salary tax free in it.

The principle behind Dogs is to look for stocks that are currently unloved (the share price is low) and have high dividend yields. Select the 10 highest yielding stocks of the FTSE 100 every March, buy an even cash amount of each, then leave for a year and re-evaluate the next year. Sell the ones that aren’t dogs any more, (hopefully at a profit ūüôā ) and purchase the new Dogs, keeping the per-Dog amount around 10%. An analysis of the results of this approach is available here.

The risks are clear – though companies in the FTSE 100 don’t usually go bust a high yield usually indicates there’s trouble in Paradise. Either the company has fallen out of favour and the price has tanked, or a share split has happened, which means you are looking at the dividend which came from a share that is now represented by 10 shares. In that case you’re not comparing like with like (Cable and Wireless seem to be like this now). You need to screen the candidate Dogs against this sort of thing, and eliminate any which state future dividends will be slashed.

My ISA is small РI could only fund it with £3600 last year as my cash ISA emergency fund blocked half my ISA allocation. So my opportunity to get into the Dogs was limited. However, in my search for yield, I ended up with two Dogs already РBP and National Grid. I work for another Dog (have just checked and its recent share price appreciation means it is Dog no more), and through the  employee share purchase plans I have more than enough exposure to that Dog.

There’s something disturbing about inadvertently setting up a Dog fund in my quest for yield. Having read this Money Observer article on the Dogs strategy, this year I may look for Dogs with intent. After all, it seems to align with my values, so I will use my ISA allocation to load up with the remaining 7 Dogs next Feb/March.

how much is it costing you to get to work

petrol at 101.9 ppl
This photo was taken less than a year ago and is already obviously out of date

You generally think of work as one of the things that puts money into your bank account, but working does also cost you. Getting there and back is a hit, as is the cost of coffee, lunch, and any socialising you do. If you walk to work then getting there is free, of course, but many people have a significant journey to work and back. This is easy enough to work out if you use public transport, but it is one of those nasty little creeping expenses that mounts up stealthily over the years if you drive to work.

In my attempts of purge life of some of these costs, I am cycling to work. When I moved here I made sure that I did not live too far away from work – my London commute was 1 1/2 hours each way for a journey of 15 miles, and I knew that I didn’t want to live like that in future. I live about 6 miles from work, which is far enough away to not see it on the weekend and close enough to bike. In the interests of getting visibility I figured I should change my drop-handlebar bike for something more upright, so I wanted to evaluate the business case. I’d have a car anyway, so I will stick with simple fuel costs for calculating my savings. The results were interesting – the following Javascript calculator is preloaded with my costs, but it will let you work out your own costs if you put in your own distance, MPG and petrol costs.
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It surprised me – a classic old personal finance saw is that the cost of a daily skinny latte mounts up over a year, and here I was paying about the cost of a latte just to get to work and back. It validates my viewpoint on the bus service, which would cost me over twice the cost of driving. And it does add something to think I am saving ¬£1.64 on a bike day, which adds up to about ¬£300 a year, allowing for the fact that I don’t bike every workday, particularly in winter.

The bus service is a non-starter for two reasons. One is that due to my company’s decision to outsource a lot of the work, the outsourcing company brings people in from India on temporary 3 to 6-month contracts. Their employees aren’t here long enough to get their own cars, so they naturally use the bus. As a result it’s hard to get on the bus unless you join at the starting bus station in town. Secondly the bus service is a ripoff, ¬£2.50 each way!

Running a car is one of the big hits in personal finance. There’s already the big one-off hit of buying it, plus the fixed costs of running a car – tax, servicing and insurance. All of these things are part of the decision whether to get a(nother) car in the first place. The utility of having a car is pretty clear in most people’s cases, unless you live in the centre of London or New York. When I living in London I got a car just before leaving the city, and I had to park it about 200 yards away!

I was surprised at the cost of what is a pretty short commute. People don’t often factor in the cost of going to work in their decision of where to live, it is usually mainly the amenities of the area and the practicality of of the commute in terms of time.¬† As an example, many colleagues come in from 20+ miles away, and these guys are effectively taking a ¬£1k a year pay cut every year compared to me, and the guys doing this with Land Rovers (assuming 25mpg for the LR) are eating a ¬£2000 pay cut.

It also meant in about seven months I’d recover the cost of the bike. I don’t cycle in December of Jan/Feb and I don’t do it if rain is forecast so I’m only halfway there so far. As petrol costs rise the case for cycling gets stronger.

It’s still lovely and quiet out there with no jet aeroplane noise

Looks like  Eyjafjallajökull is still doing its stuff, though we are starting to hear military jets which presumably go at different heights?

It’s not just me that is enjoying the peace from the incessant low-frequency rumble at the threshold of hearing, though I do feel for all the poor sods who are stranded through no fault of ther own. Particularly as it looks like the travel insurance companies are going to welch on their responsibilities, surely unforeseen circumstances are exactly the reason why people buy travel insurance? D’oh…

The BBC have a graphic on why this is taking the UK out in particular.

This is bringing up other interesting stuff, such as that air freight is 25% of all imports to the UK by value. Some of the things that are air freighted are shocking. Fresh fruit, okay, but clothes? What the hell is up with that, importing clothes by air, are we nuts or what?

There is something deeply wrong about what is reported in this article

There are fears that British supermarket shelves could soon be empty of green beans, mangetout and sugar snap peas, among the main vegetables sent from Kenya each day.

We shouldn’t be airfreighting low value stuff like this. For all sorts of reasons, including

Supermarkets’ ‘just in time’ delivery schedules mean that while there is some stock kept in reserve, it is only enough to last for two or three days.

One day, we will come to bitterly regret the brittleness of our distribution systems…

freelance income compared with employment income

Feel The Fear and Do It AnywayI have always have employment income as the vast majority of my income, and this has always been working for a company. I have run a limited company on the side, so I’m not a total noob to working for myself.

As I contemplate transitioning from employment income to other forms, it strikes me that the nature of my income in future will be very different. And the difference gives me the willies. As Susan Jeffers’ book title implies, that isn’t a good reason to not do it, but these are some of the differences:

Paid employment income

  • Stable (till you lose your job)
  • reliable
  • easy budgeting
  • usually the single or main source of income

Compared with that, the business owner, writer or freelancer’s income is

  • highly variable month to month
  • very difficult budgeting, either needing borrowing or a large cash float/emergency fund
  • diffuse – several strands of work at the same time

I’m glad that I paid off my mortgage while running on steady employment income, I’m not sure I’m cut out for such a large and critical regular outgoing on a variable income. There again, I have been lucky enough to be able to weather two recessions without losing my job, for the downside of employment income is that it is usually the only source of income. An employee is stuffed when they lose their job, compared to a freelancer who happens to lose just one income stream of several.

The feast or famine income pattern of freelance work isn’t to my taste at all. In some sorts of work I am looking at clients have a quarterly cycle of payments, add a couple of 90-day terms to that, and you can end up flogging your guts out but still being skint for six months, and when it comes through the temptation will be there to kick back for a while.