Has Dave Ramsey Lost The Plot On House Deposits?

House prices continue to soar ever higher. The average property price rose by 10.9% over the year, meaning the average home in the UK cost £277,000, which is £27,000 higher than last year, according to figures from the ONS.

Compounding the problem for wannabe homeowners is rising rents. The Guardian reported that the average advertised rent outside of London is 10.8% higher than a year ago. Property website Rightmove said it was “the most competitive rental market ever recorded.”

This got me thinking – how can anyone afford to buy a house and what is the best way to save for a house deposit? Well, it’s certainly not easy. The average age of a first-time buyer in the UK is 34 years old and this is 6 years older than the average age of a first-time buyer in 2007.

Dave Ramsey is a well-respected and popular finance guru over in the US; some might say he’s the US equivalent of Martin Lewis. In this post we’re going to examine his views on how to save for a house deposit, including how much to put down for a deposit, what to cut from your spending, how to earn more, and where saving for a house fits within his 7 baby steps for mastering money.

Whilst we think Dave Ramsey overall has an excellent message, there are many things we disagree on and much of what he says doesn’t translate over here in the UK, despite legions of UK fans hanging on to his every word. This is going to be an interesting one. Let’s check it out…

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The State Of The Housing Market

If you were thinking that everyone else seems to be on the property ladder but you’re not, then know that you’re in good company because the reality is quite different. One in three of the millennial generation, born between the mid-1980s and the mid-1990s, are expected to never own their own home, according to the Guardian.

The FT stated that in early 2021, the average house deposit for a first-time buyer reached almost £68,000, which was around £18,000 more than in 2019. That’s deposit inflation of 36% in just 2 years.

How Much Should You Spend On A House?

Dave says you want a 15-year fixed-rate mortgage where the payments are no more than 25% of your monthly take-home pay. In fact, that 25% should include all your housing costs such as property taxes, which is essentially the US equivalent of our council tax. So as a couple if you earned £4,000 after tax, then your total housing costs would be no more than £1,000 a month.

He goes on to say that “the reason your mortgage payment should never be more than 25% of your monthly take-home pay is because you’ll have plenty of breathing room in your budget to tackle other financial goals—and keeps your house from owning you.”

Straight off the bat we have multiple problems with this. Firstly, we don’t know what the US mortgage market is like, but we checked a big mortgage comparison site in the UK and there seemed to be only one lender offering 15-year fixes, which was way more expensive than a typical 2-year deal. At time of writing a 2-year fix might cost 2% a year, whereas fixing for 15 years would cost around 3.7% a year.

To be fair, although this seems like a huge difference, 3.7% might turn out to be cheap considering the expected direction of interest rates right now, but first-time buyers need every upfront cost saving they can get their hands on.

Plus, we would never encourage anyone to lock themselves into a deal for more than 2 years, let alone 15. The fact is that relationships breakdown often forcing you to sell the house; the person you love right now could be impossible to live with in a few years’ time. The UK divorce rate is estimated at 42% and almost half of these breakups tend to happen in the first decade of marriage, when you’re buying that first house together. Our bet is that the number of breakups outside of marriage is even higher.

The problem is that mortgage fixes always come with horrendous early repayment charges. In this case it would be 5% in the first 5 years. That would be a £15,000 penalty if the mortgage outstanding was £300,000. These might be incurred if you had to sell the property. You can often avoid these if you move the mortgage to another house, but you must stick with the same provider, limiting your options.

Also, Dave is also saying that the mortgage should be paid off in full by the end of this 15-year fix. But let’s not forget to mention that a 15-year mortgage term is ridiculously short for a first-time buyer – almost laughable. Most people in the UK can’t even get on the property ladder with 30-year terms, which have more affordable monthly repayments.

With house prices surging, one of the only levers to pull is to extend the mortgage length in order to reduce monthly payments. It’s a must! In this example (Debt: £250,000, Interest: 3.5%) monthly mortgage repayments would be £665 more based on a 15 vs a 30-year mortgage term (£1,788 vs £1,123).

Another point Dave misses is that even if you want a short mortgage term (some of you will) it’s often better to get the longest mortgage term you can get and make overpayments (make sure you get a mortgage that allows this without penalties).

If you get a short term, you are contractually obliged to make those payments, whereas overpayments are optional.  If you default on your mortgage you run the risk of having your home repossessed. Life will throw a lot of curve balls, so there’s no need to tie your hands for the same end result.

How Big Should Your House Deposit Be?

Dave recommends a 20% deposit as it gets you out of paying for private mortgage insurance. However, as this seems to be a US specific insurance, it doesn’t apply to us in the UK. Nevertheless, he says if you can’t do 20%, that’s okay but don’t go any lower than 10% – otherwise you’ll be stuck paying extra in interest and fees, putting you further in debt for decades!

Our views on mortgage debt, especially cheap mortgage debt differs from what Dave believes. He considers mortgage debt to be a necessary evil, but when interest rates are low, we consider mortgages to be an incredible wealth building tool.

If you can earn 8% in the stock market on average but only pay 2% on your mortgage, then over time your wealth could be hundreds of thousands of pounds higher by choosing to pay as little as you can on the mortgage and investing this instead.

This doesn’t mean put down the lowest deposit possible though. Due to banks giving preferential rates to those with more equity, we previously calculated that the optimal deposit size or house equity was somewhere between 10-25%, and anything over this was wasting an opportunity to invest with dirt cheap money.

It’s important to note that the optimal mortgage deposit size depends on your specific circumstances and prevailing interest rates. If you want the full explanation of how we worked this out so you can calculate it for yourself, we go into some detail in these videos (here and here), so these will be worth watching next.

Because mortgage debt is long-term – it can be up to 40 years – this is enough time for any stock investments to ride out any bad years. Dave Ramsey must believe this to a certain degree because even he recommends paying 15% of your household income into retirement savings before paying down the mortgage early.

How Long Should It Take To Save A Deposit?

Dave says it should take no more than 2 years to save a deposit. Again, this might be reasonable in the US – we don’t know – but in the UK we can’t imagine many people being able to do it in 2 years. As we said earlier, the average age of a first-time buyer in the UK is 34, and we think most people will start actively saving from their mid-twenties. The fact of the matter is you will need tens of thousands of pounds which for most people will take several years.

Where Should You Save The Money For A House Deposit?

Dave’s recommendation is a US specific product called a money market savings account but in the UK that would just be savings account. And we agree. If you can save for the deposit in a few years, then stash the cash in an easy access savings account, Premium Bonds, or a Cash Lifetime ISA if the house price will be below £450,000. You can’t risk losing your home purchase by investing the cash and seeing it fall in value.

We know that inflation is killing that cash while it sits there. But we think this is one occasion where we wouldn’t be happy to wait a decade for the stock market to recover if it halved in value right before we wanted to purchase a home.

The exception might be if, realistically, you know it will take many years to save for. When the dream of buying your own home is looking at least 5 to 10 years away, then you might think about investing in the stock market instead, perhaps with some bonds to reduce portfolio volatility.

Streamline Your Budget

This is Dave’s fancy way of saying, “cut all joy from your life and live like a pauper”. Some ideas from Dave include taking a break from the gym, stop eating out, and stop buying clothes, amongst other things. Apparently, these alone could save you in the region of £450 a month.

Yes, you probably could make some savings, but this sounds like a massive exaggeration for most cash strapped people who are likely already watching what they spend like a hawk.

Some expenses might even help you save money elsewhere; Netflix is cheap and could alleviate boredom, so you don’t go out and spend even more. Same with the gym. If you’re spending 4 days a week working out, at least you’re not going elsewhere and having more money escape from your pocket.

We definitely agree there should be cuts where possible – just remember you might be saving for many years, so make sure you’re still living a life worth living.

Temporarily Pause Your Retirement Savings

In a surprising twist Dave says it’s okay to temporarily pause your retirement savings. Just make sure this is only a one-to-two-year detour, not a five-year pause! This means that Dave Ramsey’s 7 Baby Steps is really more like 8 steps, with saving for a house deposit slotting in as the new number 4.

We would tend to agree with cutting down on the retirement savings if the timeframe was short, except we would always take advantage of any employer matched pension contributions. Most employers will only match 3% to 5% so whatever you save into your employer pension shouldn’t be too much of a drain on your house deposit savings. But as this matched contribution is effectively free money you don’t want to miss out on this.

Boost Your Income

If you’re familiar with Dave Ramsey you’re probably anticipating that he will say, “get a 2nd job, like delivering pizza during the night!”. And Dave does not disappoint.

Never mind that Americans already work on average 47 hours a week, Dave now wants you to take the graveyard shift at Dominoes. Sleeping and some recovery time is obviously seen as a luxury at Ramsey Manor.

Here in the UK maybe there’s a little more scope for some extra work – the average hours worked comes in at 42 hours a week, but unless it’s a hobby you’ve managed to monetise, we wouldn’t want to do this at all. Going gazelle intense as Dave would say might be a short-term solution for someone drowning in debt but it’s a tall order for someone who just wants to own a home.

As for what second job you should take, not to worry, Dave has some suggestions. Apparently, if you like driving, get a second job with Uber. Because as we all know, cruising down a nice open country road is the same as ferrying drunks around in the back of your cab at 2am in the morning.

For those of you who don’t mind working all hours, then don’t let us stop you. We ourselves effectively had a second job while we got the Money Unshackled YouTube channel off the ground, but this was a hobby at the start.

Perhaps a better money-making option is to double down on your existing job. Can you get a payrise or a promotion, or do some paid overtime? At least this way the extra effort will help boost your primary income and your reputation with the boss, which could have longer lasting effects.

Cut The Extras And Save Even More

Dave has already slashed your day-to-day budget but evidently that wasn’t enough. Now, you must skip the summer vacation as well. He might be on to something, but we’d first look to see if you can still go on holiday but find somewhere cheaper. You don’t need to spend several grand going to Disneyland Florida when you can go to Tenerife for a fraction of the price and still have a wicked time.

Dave also says to sell some stuff. I bet most people will think this is a waste of time or their stuff isn’t worth jack, but I’ve been clearing out loads of clutter and have already made around £2,000 with more stuff to go. By the time it’s all gone I reckon I will have made £3,000. A couple could have double this!

How realistic are Dave Ramsey’s tips on saving for a house deposit? Helpful or out of touch? Join the conversation in the comments below.

Written by Andy


Featured image credit: YouTube

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

The Truth – Why You Can’t Afford To Buy A Home

It seems that every government policy to help first‑time buyers get onto the housing ladder has in fact pushed up house prices even more! The average price of a property in the UK jumped by 10% to £253,000 over the year to December 2021. And that’s just the average. Try living in London, where poky properties passing as legal homes average over £500,000.

Swathes of twenty and thirtysomethings can’t get on the property ladder, and the disparity between house prices and wages may make your low salary seem like it’s the fundamental problem. House prices after all are 65 times higher than what they were in 1970, while wages are only 36 times higher.

It’s more complicated than that, as we’ll show, but this certainly doesn’t help.

A 10% deposit for the average house is now nearly as much as the average pre-tax salary. And since house prices grew by £24,000 this year, you would need to have saved £2,000 a month just to keep up, assuming you’re already at the borrowing limit for your salary level set by the mortgage lenders.

Industry guidelines say that mortgages should not be larger than 4.5 times a borrower’s income, so as prices rocket, your deposit has to cover the full amount of the price growth as the banks won’t lend you any more cash. But there has to be some kind of a limit to how much you can borrow, for simple affordability reasons, so it’s not the bank’s fault that you can’t afford a house. Something else is going on.

As a wannabe homeowner, you wouldn’t be blamed for thinking that the housing wealth of others is being protected above and beyond your need to get on the ladder.

As an investor in property following this closely, I’m inclined to agree with you! Why is it that the many government policies for helping first-time buyers never seem to actually… help? And are they in fact just making it worse? Let’s check it out!

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#1 – Scrapping The Stress Test

This first one’s not the government’s fault, but the devolved Bank of England’s. They have confirmed plans to scrap the rate rise stress test for mortgage borrowers, making it easier for you to get a bigger loan. The test checks if borrowers could still afford the mortgage in the event of an interest rate rise of 3%.

It’s great news for people looking to buy right now, since removing this restriction would make it easier for borrowers to take out larger mortgages, helping those who were stopped from buying a house by this rule.

But it’s terrible news for those still saving up for a deposit. That’s because mortgage experts have warned that bigger mortgages would also send house prices even higher than they are already.

Simple market forces mean that when buyers have more cash at their disposal due to a bigger mortgage, sellers will put up their prices to match.

#2 – Help To Buy

Now we turn to the government’s flagship policy to help first-time buyers: the Help to Buy equity loan. This has allowed homebuyers to borrow up to 20% (or 40% in London) of the cost of a new build property from the government, reducing the size of the mortgage needed. Users of the scheme could also get away with having a deposit of just 5%.

Lower mortgage, lower deposit. Sounds good in theory, but there were effectively no limits on the amount of money that builders could make from the scheme, and the ticket price of new builds went up accordingly. New builds already have a premium built into the price, so you have to wonder whether this type of scheme really helps first-time buyers onto the property ladder.

Plus, a study from the National Audit Office found that the scheme mainly supports buyers who do not need the money, and crucially, has helped to inflate already high property prices.

As a side note, we must point out that there’s no equivalent help for people who currently do not own a home but have in the past. People who’ve broken up with partners for instance might be in the same or a worse situation financially as a first-time buyer and in the same age bracket but get zero help back onto the housing ladder.

#3 – The Stamp Duty Holiday

This next one’s on Rishi – it’s clear that the stamp duty holiday during the pandemic, which meant there was no stamp duty on properties up to £500,000, helped to push house prices to new records, and they never went down again once the holiday was ended.

This one must be particularly irritating to first-time buyers because they already pay no stamp duty on houses worth up to £300,000, so this policy only helped existing homeowners, while pushing up market prices for everyone.

Existing homeowners had the chance to save up to £15,000, while the market for everyone has risen by £24,000 in the last year alone.

#4 – Lifetime ISAs

In what is perhaps the best policy idea so far, the government’s introduction of a Lifetime ISA gets less and less helpful as house prices rise. The Lifetime ISA gives a 25% bonus on savings for a house deposit, but stupidly it has an arbitrary cap meaning you can only use it on properties worth £450,000 or less.

The insane part of this cap is that the benefits aren’t even pro-rated! If you buy a house worth £451,000, you cannot use the Lifetime ISA at all – you lose your built-up 25% bonus, and you have to pay a penalty to access your money! That limit, by the way, has stayed the same since it was introduced in 2017. If it had risen with house prices, it would now be £549,000.

If you live in an area where house prices are around £400,000, there’s every chance that they could have risen to the cap of £450,000 by the time you’re ready to buy a year or so from now, completely scuppering your chances of buying if you’re saving within a Lifetime ISA.

We could tell you to move somewhere cheaper, but how far should you be expected to move out of the cities? Londoners will be living in the Scottish Highlands before much longer.

#5 – Planning Law Shake Ups Cancelled

What home buyers really need from the government is not another tweak, or tool, but for it to build some more goddamn houses. In 2021 the government was gearing up, finally, for a major overhaul of the planning system, the biggest barrier to home building.

But… the plans were abandoned after the Tories lost a by-election, since the affluent voters in the area who failed to vote Tory were unhappy with houses being built in their area.

#6 – Low Interest Rates

This next one’s on the Bank of England, but it wasn’t really their fault, given the circumstances. Between 2007 and 2009, given the financial world was burning around them, the Bank lowered interest rates from 5.75% to 0.5%.

This helped to fix the economy but caused house prices to rocket. What really matters with house buying, aside from the initial deposit, is the affordability of the monthly payments.

A £600k house with a 10% deposit might require a mortgage payment of £2,000 a month when the base rate is at 0.25%, whereas in 2007 that house could have been worth just £320k and still have cost you the same in terms of your monthly budget when the base rate was 5.75%. When rates were lowered, simple market forces ensured that the prices of houses, which are in limited supply, rose in line with monthly affordability.

#7 – Brexit

This next one is a mixed bag of good and bad news for aspiring home buyers. Let’s start with the good news.

The irony of Brexit is that Londoners who were most in favour of open borders immigration will be the ones who benefit the most by a fall in house prices if the population size of the UK were to decrease or even if growth slows, which is more likely.

In the UK, in the 10 years leading up to the 2008 financial crisis, house prices tripled. That’s largely because for every 4 new people that entered the economy through population growth and immigration, only 3 new houses were built. Simple supply and demand.

Brexit is also believed to be a major factor involved in the recent pay rises seen across the UK – a double edged sword, because house prices can rise further still if some people are being paid more highly. But if you did get a significant pay rise this year, you might be better able to save for a deposit.

If, however, you’re one of the unlucky people who did not get a pay rise in the last year, houses will still have risen slightly due to those who did now being able to afford a bigger mortgage, but your wage still sucks. As we said, a mixed bag.

#8 – Lockdowns

While a dwindling number of people still think the lengthy lockdowns didn’t cause any harm, there’s no doubting that this government policy had a seismic impact on the housing market.

Home workers, cooped up all day, probably already realised that their houses were too small to live in comfortably… but were forced to confront this reality when they were stuck in it 24/7. The demand for spacious family houses has skyrocketed. It’s no longer just about supply of housing, but also a matter of quality, and space.

#9 – Stamp Duty For Pensioners

We hate stamp duty in general and have moaned about it often on this channel because it’s a transaction tax that interferes with what should be a free-flowing housing market. If there’s one area where stamp duty is holding back the property market the most, it’s when it’s charged to pensioners.

As we just discussed, people now care more than ever before about the quality and size of their home. But a huge chunk of the 4-or-more bed family homes are in the hands of older couples whose kids have long since grown up and flown the nest.

If these people could be incentivised to downsize and give up their huge houses so that a young family could move in instead, it would vastly increase the supply of quality family homes and bring prices down.

However, the government actively disincentivises pensioners from moving home, because if they did, they’d be instantly whacked with a huge stamp duty tax to pay. An older couple moving from a £500k 4-bed house to a £400k 3-bed house would have to pay stamp duty of £10,000! No wonder they don’t downsize.

Reasons To Be Cheerful

It’s not all bad news for aspiring homeowners. Thanks to the tax rises and energy price increases heading our way in April, we’re all about to made poorer… great news for house prices!

Ironically, when everyone has less cash, house prices go down to meet what the most well-off savers can afford to pay. The cost of living crisis might actually precede a slight fall in house prices. Yay…

There’s also the prospect of further interest rate rises this year, which will increase your mortgage interest but… it will also lower everyone’s affordability calculations and hence the amount the banks will lend, and therefore lower the maximum market prices that properties can be sold at. Silver linings, eh?

Do you own, or are you still saving up? How hard has it been for you? Join the conversation in the comments below!

Written by Ben


Featured image credit: William Barton/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

If You Could Only Watch 1 Video…

We’ve been producing videos on YouTube for about 4 years now and uploaded nearly 450 videos. Over that time, we’ve dished out what we hope are helpful financial tips covering investing, retirement, tax, debt, economics, business, and everything in between.

That’s a lot of content, so in this post we’ve hand selected our best ever money tips that we truly believe will make a massive positive impact on your life and wealth. Think of it as our greatest hits.

This post can only ever be a summary of these life changing points, so we’ll also provide links to some of the key videos that explain further. This particular post is a perfect demonstration of what Money Unshackled is all about, so if you’re new here and find it useful, consider subscribing to the email newsletter and YouTube channel. Now, let’s check it out…

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#1 – Avoid Dividend Tax With Synthetic ETFs

Broadly speaking Exchange Traded Funds (ETFs) come in two forms: Physical and Synthetic. Physical ETFs physically own the basket of stocks they intend to track the performance of, while Synthetic ETFs hold different assets and then swap the performance of that basket with an investment bank to achieve the desired index performance.

Synthetic ETFs are so awesome because they can be used to circumvent some country’s dividend withholding taxes, saving you a fortune and getting you to your financial goal potentially years earlier. Most notably you can avoid that horrid US dividend withholding tax, and with US stocks likely making up the bulk of your portfolio this is a game changer.

Normally any US equity ETF you invest in, like the S&P 500, would pay 15% withholding tax. In recent history the yield on the S&P 500 has been around 2%, so that’s a drag of 0.3% on your return. Doesn’t sound like much but that is huge over your lifetime.

An investor saving £500 a month for 40 years, earning 8%, ends up with a portfolio worth £1.62m. If that return becomes 7.7% due to the withholding tax, the portfolio is only worth £1.50m. £120k less.

There is also every chance that we are being conservative with those numbers. The yield on the S&P 500 in the past has been more like 4%, so that tax drag would be even more substantial at 0.6%. And, in our example we based it on a 40-year investment timespan. Realistically you will have some money invested in the market well beyond your retirement day and likely up until your deathbed.

Therefore, the more you invest and the longer you invest for the more important it becomes to avoid paying unnecessary taxes, which over time siphon off your wealth. Synthetic ETFs are awesome!

#2 – Optimising The Size Of Your Mortgage Deposit

Many people’s negative attitude towards debt means that the common financial advice is to have the biggest house deposit possible and overpay on your mortgage to rid yourself of the debt as soon as possible.

Contrary to this, other people argue the exact opposite that you should have the lowest deposit possible and do as much as you can to avoid paying down the debt. The argument is that the interest rate is so cheap you can get a better return on that money by investing it.

Both approaches are flawed. Instead of being in either of these camps we invented our own approach. We carried out an investment appraisal, thinking it might be better to target specific LTV bands to find a balance between avoiding high interest and freeing up cash to be invested elsewhere for greater return.

We crunched the numbers and found at the time of doing the video that the optimal deposit from a purely financial perspective was 10%. This an updated version of this analysis but this exercise should be carried out for your specific circumstances and the latest interest rates available to you at the time, so these figures are just a guide.

A 10% deposit currently gives you a 14% marginal return on investment over and above a 5% deposit, so it makes sense to put down at least a 10% deposit if you can. However, as you move to a 15% deposit the marginal gains on the extra deposit amount are just a 5% saving, and then just 2% as you progress to a 20% deposit. On the assumption we can earn 8% in the stock market, sitting within these bands doesn’t make financial sense for those who don’t mind a bit of risk.

With a 25% deposit there is quite a jump in the marginal benefit, so we wouldn’t give you a hard time if you chose this amount of deposit or home equity. But from that point on there is almost no marginal benefit from paying down your mortgage, so you would likely be better off investing.

#3 – Spread Betting Futures

This may well be the single biggest win for investors who are prepared to spend the time learning the ropes of this very clever but high-risk investing strategy. This is our own formulated strategy – you won’t hear this anywhere else. What we have done is create a balanced portfolio to reduce portfolio volatility, and then ramp the risk back up with leverage to earn hopefully mega returns.

The strategy involves using a spread betting account to invest in S&P 500 futures, long-term US treasury futures, and gold futures in a 60/30/10 ratio. This was specifically chosen because historically for this mix of assets the largest ever drawdown – that’s the largest fall from top to bottom – was less than 30%. Government bonds tend to move in the opposite way to stocks when stocks crash.

On the assumption that history broadly repeats itself it means we can leverage the portfolio with up to 3x leverage and never get wiped out, which is vital whenever you invest on margin. That’s a big assumption but the beauty of the strategy is you can choose the amount of leverage you use, so you could do 2x or 1.5x. You can even use no leverage.

That begs the question why would you use a spread betting account with no leverage? Spread betting is technically classed as gambling by the powers that be, so there’s no capital gains tax to pay, even though our particular strategy using indexes is no different to any other long-term investing strategy. The author of the book The Naked Trader refers to a spread betting account as a Spread ISA because of the tax benefits.

In the past a non-leveraged portfolio like this would have earned 11% annually, so with 3x leverage we would hope to get 33% less any fees. We’re not expecting quite this much going forward but even half that would be incredible!

#4 – Matched Betting

Matched Betting despite the name is a great way to make some side income with relatively little risk. On the back of some of our previous videos, we’ve had people thank us for introducing them to this great money-making technique. Some people even claim to have made several thousand pounds from it but as a minimum you should be able to make several hundred with just the welcome offers.

Matched betting is a betting technique used to profit from the free bets and incentives offered by bookmakers. Bets are placed on all outcomes of a sporting event, so a negligible amount of money is lost. You are then rewarded with a free bet. You repeat the exercise to turn that free bet into real cash you can withdraw.

There are usually over 50 different bookmakers all throwing free bets and incentives at you, so there is plenty of easy money to be made.

To do this efficiently and to maximise profits you will want to sign up to some matched betting software. These literally walk you through the entire process and serve up the best bookmaker odds. Visit this page where we have a range of exclusive offers to the leading matched betting service providers, so do check that out.

#5 – Massive ROI With Buy-To-Let Property

We talk about buy-to-let property a fair bit on this website (and on YouTube) because it has the potential to make ordinary people rich, in years rather than decades. Ben (MU co-founder) currently owns 4 buy-to let properties and he credits this investment as the single biggest factor in his wealth building journey.

The reason why buy-to-let is so effective is mainly because of the leveraged returns that are achieved by using a mortgage. We’ve substantiated these figures in some of our YouTube videos but on a high level, if your property increases in value by 4% and you only put down a 25% deposit, your return on investment from capital gains alone is 16%.

You will also earn rental profits on top that can easily push up your total return to somewhere around 20-25%. Obviously, this strategy doesn’t work if you choose a bad property. Not all properties make good investments and in a way your profits are determined by what house you buy and the price you pay.

As a property investor you need to remember to invest according to which properties do well, not necessarily the type of house you want to live in. My particular strategy is to buy terraced houses in northern city locations as they command good rental yields, have excellent demand, and are amongst the most affordable.

For those interested in investing in property, if you are prepared to spend a great deal of time learning the market and then managing your own properties you can do everything yourself, but if you want to avoid having to essentially take on a second job you could get in touch with our preferred property partner via the Find Me A Property page.

[H2] #6 – Equity Release

I put this right up there with buy-to-let property as a means to grow wealth, with one complimenting the other. In fact, my ability to buy so many properties was largely due to equity release.

Most people who own property for a long time end up with substantial amounts of equity tied up in their home that is doing nothing. A savvy investor might prefer to borrow against their home and invest that money elsewhere.

Typical mortgage rates are less than 2% and have been that way for several years now. The stock market is widely expected to return 8% a year on average, so you could profit in the tune of 6% on average per year by moving equity from your home to the stock market.

The reason why mortgages are so good for this is because it’s long-term debt that is not callable. As long as you are meeting your agreed monthly repayments the mortgage cannot be called in no matter what else is happening in the wider economy and stock market. This gives your investments time to recover if they happen to fall in the short-term.

If you could release equity of £100k and profited 6% a year, you would earn £6,000 extra a year going forwards for doing relatively little other than moving some money around and taking on some minimal financial risk. As Ben chose to invest the money from the equity release into buy-to-let property he was earning significantly more on what otherwise would have been wasted capital.

[H2] #7 – Retire Early With A Pension Bridging Strategy

We believe everyone should be working towards retiring as early as possible, but pensions put up some roadblocks as they have an age restriction on when you can start withdrawing from them. Currently this is 55, which is due to increase to 57, then 58, and who knows how high this could climb?

Many hard workers who have diligently invested wisely may have enough money or be able to save enough so they never need to work a day again. However, it’s no good if it’s all locked away in a pension.

It seems that many ordinary people save exclusively within a pension, of which some build up huge sums and yet still can’t retire early due to the aforementioned age restriction. While some other aspiring early retirees disregard pensions completely despite the huge benefits.

What we teach is to use multiple investment products including accessible accounts that allow you to retire earlier in the most tax-efficient way possible. These accessible accounts enable you to bridge the gap between your desired retirement day and the day your pension becomes available.

Most people will want to invest in a pension because they are epic. You should get matched contributions from your employer, which is effectively free money and a 100% immediate gain. You also get tax relief, which for a basic-rate taxpayer adds 25% to your contribution, or 67% for higher-rate taxpayers. And if you’re lucky enough to have an employer using salary sacrifice you can avoid national insurance and student loan repayments.

But before you can access the pension cash you can use the likes of a Stocks and Shares ISA, buy-to-let property, and spread betting accounts to bridge the gap. You could even borrow against your home, which can be paid back with your tax-free pension lump sum when you get it.

[H2] #8 – Diversify Across Time

When we first heard this, it blew our minds and changed how we perceived risk forever. It was a concept we read about in a book called Lifecycle Investing. Essentially, due to how people come into wealth they start with relatively little when they’re young and end with a big sum at retirement age.

This uneven distribution of wealth across your lifetime means that the investor is almost completely exposed to the stock market risks at the end of their life; the market movements in those early years are largely irrelevant to your overall lifetime wealth as you have so little money invested.

The author’s proposition is for you to try and control as much of your lifetime wealth as possible as early as possible. To achieve this they recommend using 2:1 leverage and are only proposing this amount of leverage at an early stage of life. This way, investors only face the increased risk of wiping out their current investments when they are still young and will have a chance to rebuild.

The suggested path is to first leverage your investments in stocks, then reduce the leverage in the middle part of your life, and then finally move into an unleveraged stocks and bonds portfolio as you approach retirement.

We can’t say we agree with their precise strategy but the concept of diversifying across time is a game changer.

Which of these financial points has had or will have the biggest impact on your money? Join the conversation in the comments below.

Written by Andy

Links to key videos on these subjects:

Synthetic ETF (Ultimate Portfolio): https://youtu.be/xIK07tgv_14

How Big Should Your House Deposit Be: https://youtu.be/nuj456bkslU

Spread Betting Futures: https://youtu.be/1hzb_zIIdmY

Matched Betting: https://youtu.be/R6zbzk04BHI

Massive Returns With Buy-To-Let Property: https://youtu.be/gmioY5HxlDk

Equity Release: https://youtu.be/XA-an3NozVo

Pension Bridging Strategy: https://youtu.be/Nd-GUcBZFCo

Time Diversification: https://youtu.be/JpoWZ_K_iA0


Featured image credit: daniiD/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Big Bold Money Moves To Make In 2022 To Explode Your Wealth

Today’s post is about taking massive action to significantly change the course of your life.

We’ve covered the need for regular monthly saving and investing on this site a lot – the small incremental steps that almost guarantee eventual success. That is all very important stuff and must be done, but arguably more important are the big, one-offs events that transform your finances in one go.

Looking back over the last few months and years, have you taken some specific action that you can single out as the point when you achieved something big financially?

Let’s make this next year count, with massive action. It’s time to put a stop to all of your years merging into one long line of working and saving.

If you want to grab some free cash, check out the Offers page. Loanpad, EasyMoney, Octopus Energy, and others are all giving away £50 in welcome bonuses. Free stocks potentially worth hundreds of pounds are available too.

Alternatively Watch The YouTube Video > > >

What Is Massive Action?

Massive action in the personal finance world is when you spend a short amount of time to implement a major change to your life which from that point on results in a bigger income, lower costs, and/or more free time.

It is an event, rather than a lengthy process – though it may be followed by continuous action such as starting and then managing a business. Massive action instantly changes everything about your money making potential or return on investment. Massive action might also be a restructuring of your working life which results in you having more free time to work on your life goals.

The End Goal

So how will taking massive action result in you getting rich? Your end goal might be to massively increase the income you earn from your 40 hour work week. Or, maybe you’ll slash your expenses so much that you can retire a few years earlier. Maybe you’ll engineer a shorter work week, making more time for family and friends. Or, maybe… you’ll establish multiple income streams.

This last one is the secret that sets the rich apart from the working and middle classes. Nearly everyone in the UK has just a single income stream – their job.

They may have a few quid from dividends or interest trickling in each month too from savings accounts and investments, but because no massive action has been taken these pots are small for most people, and the income insignificant compared to their wage.

Having several income streams in addition to your main wage, each providing at least a few hundred quid to your total income, is all but guaranteed to result in you becoming rich.

Let’s now look at the practical bold money actions you can take to initiate this change and rocket-power your wealth.

#1 – Reset Your Primary Income Stream

Before you get started on building multiple income streams, first focus on your main one. If you’re not satisfied with what you’re earning from your job or maybe you’re having second thoughts about your career choices, then it might be the time to hit that reset button.

Usually, changing jobs alone isn’t enough because you’ll probably end up in another one with similar pay to what you’re already on, in a similar field to what you’ve done in the past. Your CV will allow little else.

Instead, consider abandoning your current career path altogether and going through the short-term pain of retraining. Unless you’re passionate about your job it’s unlikely you’ll ever rise to the top anyway. Your massive action in this regard might be paying those fees for a new degree or professional qualification.

As an example, someone who puts themself through a professional accountancy qualification can make around £40,000 on the day they qualify.

If you’re stuck in a lower paying career, signing up to a professional course like that could mean you make significantly more money going forward for the same number of hours worked each week.

On the flip side, it’s just as bold to scrap a qualification that you’ve already earned, in favour of taking a different path. We both did this, choosing to end lucrative careers in order to strike out on our own with this website and our YouTube channel.

#2 – Start Your Own Venture

You’ve heard us preach the virtues of starting a business or side hustle before, so all we’ll do here is remind you that this can be an excellent second income stream alongside your main job. Quitting your job is optional, once you’ve built your venture large enough.

As such, we believe most people would benefit from having a side hustle, especially if you can monetise a hobby. In fact, in the UK, 1 in 4 people do have a side hustle, and have already taken the massive action to set this up, contributing an estimated £72 billion to the UK economy.

Some of these hustles will be true businesses capable of going to the moon, and some will just be second jobs. But if you enjoy what you’re doing and are making extra money then it’s all good. Some practical steps you can take to make sure that you commit to the idea of a side hustle are as follows:

[1] Register your new business as a limited company on Companies House. The act of making it official may seem inconsequential, but it makes it feel real and exciting, and gets the ball rolling.

[2] If your business idea requires you to learn new skills (which it will), go all in and sign up to a proper course that teaches those skills.

Maybe you want to learn carpentry, so you can make and sell furniture on the side. When you hand over your money and attend the course, you’re far more likely to make a success of it than if you just bought a book or watched some free videos on YouTube.

[3] Announce your services to the world. You should be making good use of all the local Facebook groups in your area to tell the world about the service you’re offering. All your friends and family will know, and it will be harder to go back.

If your service isn’t confined to the local area, find the time to build a website.

#3 – Materially Downsize Your Outgoings

The amount you can invest each month is significantly affected by your outgoings too. But trimming a bit of fat from your household budget is unlikely to make that much of a difference.

There are, however, perhaps 2 main expenses you need to focus on that can be vastly reduced with massive action, improving your savings rate and future wealth.

These 2 areas are cars, and housing. Starting with housing then, you can save hundreds of pounds a month and many years off your mortgage payments if you were to move to a cheaper city.

Londoners could more than halve their housing costs by relocating to Manchester. Residents of leafy Cambridge could have a similar lifestyle in York, again for a fraction of the price.

Regarding cars, there are a few actions you can take to slash hundreds of pounds a month from your car expense.

  • If you’re a multi-car family, drop to one car. Even the most basic of cars costs at least £200 a month, and often more once you factor in insurance, tax, depreciation and maintenance.
  • If you’re leasing your car, stop doing that! Buy a second-hand car instead. Even a 3-year-old equivalent model to your current lease car will save you a fortune.
  • If you drive a BMW, Mercedes, Audi, Tesla or other top-end car, trade it in for a Ford or a Kia. You can invest the difference, and it won’t cost so much to service.

#4 – Get A Lodger

While this probably fills most homeowners with dread, getting a lodger is not a permanent fixture – if you don’t get on with them, you can ask them to leave. But they CAN bring in £400 or more a month in passive income – I once enjoyed this boost to my income for nearly 2 years.

#5 – Investing Action

Starting to invest in the first place can be a mental leap too far for some. This won’t be an issue for many of our viewers who have already taken massive action in opening their first investment account, but for many people it’s a big psychological hurdle to overcome.

We suggest starting out by putting a material, yet losable, amount of cash into an investment account, which might be a couple of hundred quid. That first deposit is like breaking through a mental wall.

I remember my first investment well. Other than a brief dabble at age 16, I had done nothing until around 6 years ago, where in a moment of inspiration whilst chilling in a holiday cottage I decided enough was enough, opened a Stocks & Shares ISA, and whacked £500 into a stock market fund.

This action spurred me to then properly research what it was I’d just bought – it was something undiversified and expensive like a managed fund – but this was how I began investing like a pro, from that first leap forwards.

Most people do already invest, though they may not realise it, because their pensions are invested in the stock market. But the quality of the investments in a workplace pension, as we said before here, are often substandard.

You could potentially increase your retirement wealth by hundreds of thousands of pounds by simply taking a weekend to understand what your pensions are invested in and moving that money into better and more suitable funds. You might also want to perform this exercise on your Stocks & Shares ISA if you have one. Here’s some videos to get you started [How To Build The Perfect Vanguard Portfolio & The Ultimate ETF Portfolio – Low Fees, Low Taxes, High Returns!].

Wealthier investors might choose this next year to be the one where they add a seriously high returning asset to their portfolio – a buy-to-let property.

I’ve taken massive action 4 times now with buy-to-let – buying one isn’t as simple as buying a stock. The cash profit I earn monthly from my 4 rentals brings in at least an extra grand of income each month. More information on my property strategy here.

#6 – End Relationships

A controversial one perhaps, but sometimes the relationships you have with partners or friends can be holding you back from achieving your potential. With regard to partners, their financial priorities may not be in line with yours.

Maybe they are a big spender. Or maybe the two of you have conflicting life goals, such as financial freedom and travelling the world at age 40 for you, versus work and a community-based life for her. Is it time for a fresh start?

Likewise, if your mates like to blow their wages and waste their weekends and are dragging you down to their level, then maybe it’s time to find a better network as you are the average of your 5 closest friends.

#7 – Master Good Debt

The massive action which started my rental property portfolio was doing a low interest equity release on my own house for some 50 grand, which was added to my home mortgage. I stand by my assertion that it was the best thing that I’ve ever done, and was the single biggest influence on my wealth today.

I’d go as far as to say my wealth would be a third the size that it is now, if I hadn’t taken on good debt to buy investment assets with.

#8 – The Big Clear-Out

Andy (MU co-founder) has just moved house and has realised he had a tonne of stuff that was clogging up his space and mind. So, recently he’s been selling all his possessions on eBay and Facebook, minimalist style. Well ok, not all his possessions – just the stuff that is surplus to requirements. Most of which was just gathering dust in the loft anyway.

There are 3 financial benefits:

[1] There’s less stuff to distract him from the job of making money.

[2] Less time and money goes on replacing or maintaining stuff he didn’t need when it breaks.

[3] He’s making over a grand, which he could invest.

#9 – Claw Back Time From Your Employer

As we’ve stated, you can and should also take massive action to free up more of your time. This time can then be used to implement some of the big-money actions we’ve already covered.

There really is no need to work 5 days a week, every week, without pause. Why not arrange a 6-month career break like Andy did, or drop a day and go part-time to 4-day weeks, like I did?

The action in this case is to give your boss an ultimatum. You need to tell them that this is what you want to do, and if they can’t make it work, you will have to leave. Always be prepared to walk away and find another employer who can give you what you need.

What bold steps have you made in your life or career? Join the conversation in the comments below!

Written by Ben


Featured image credit: Ollyy/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

I’ve Made £60k In 6 Months By Investing!

We’re always saying how important it is to own investments for wealth-building. But it’s one thing to hear the theory, and quite another to experience it first-hand.

Over the last 6 months I’ve made £60,000 passively, just by being an investor in stocks and property. And that is not including the value of my home either, which has also gone up significantly in this fast moving market, but which I don’t count as a financial investment.

Meanwhile, the vast majority of the UK public continue to fail to own ANY financial assets, which include investments like stocks and property held solely for the purposes of cash generation and capital growth.

In this video we’ll show how important it is to be in the market during the best days, and how bad days matter very little if you’ve played the long game.

We’re also going to address exactly HOW I’ve managed to make way more from investments than I ever could from working 40-hour work weeks. We’ll look at sensible ways that you yourself can invest for the long-term to get maximum exposure to the best trading days.

We’ll also briefly address the success of the crypto craze over the last few months. And finally, we’ll look at just how bad the investing culture still is in the UK. Let’s check it out!

Featured in this video is InvestEngine, a platform that lets you build a portfolio of fractional ETFs for FREE. Just set the percentage allocation for each ETF and you’re done – say goodbye to spreadsheets! And rebalancing your portfolio is as simple as couple of clicks. InvestEngine also offer a managed service at JUST 0.25% per year – the lowest we’ve seen.

And, new users to the InvestEngine platform will receive a £50 welcome bonus if you open an account using this offer link and deposit at least £100.

Watch The YouTube Video > > >

Written by Ben


Featured image credit: @Mehaniq via Twenty20

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

How Big Should Your House Deposit Be & What Mortgage Type To Choose?

Whether you’re an aspiring first-time-buyer or are already on the housing ladder, it pays to know what the best mortgage deposit size is. That is, the optimal amount of cash to stump up upfront to buy a house.

Getting it right can make your house deposit one of the best investments you’ll ever make; and getting it wrong by overpaying can leave you much worse off than if you’d just put that money into your pension or ISA instead.

Not only that, but the range of possible mortgage types on the market can be totally overwhelming. Do you choose a lifetime tracker mortgage, or maybe a 3-year fixed? Should you get one with arrangement fees if it means the interest rate is lower? Is there an advantage to getting a 10-year term instead of a 30-year term?

In this post, we’ll be answering all of your mortgage questions, plus we’ll cover stuff you’ve never even thought to ask.

By the end, you should know what type of mortgage you need, and be confident that you’re making the right financial decision for you. Let’s check it out!

Are you wanting to buy a property to run as a Buy-To-Let investment, but don’t know where to start? Check out the Find Me A Property page, our property sourcing service finding the right property for your investment needs.

Investors have the option of having the whole process of sourcing, buying, and renting to tenants run for you, making the entire process as passive as it can get but still producing excellent investment returns of potentially 20%+.

Alternatively Watch The YouTube Video > > >

What’s The Best Deposit Size?

For you the answer might be as simple as “whatever is the smallest amount I can get away with”, which with some lenders is 5%. We’re going to show soon just how big a mistake a 5% deposit is financially, if you can afford to put more down.

Assuming you can afford to pay a deposit exceeding 5%, let’s kick off by looking at the monthly repayments in the 5%-25% deposit size range:

The table shows the possible deposit sizes, the interest rates you’d be charged on the most popular products as of November 2021, and the money that would come out of your bank account each month, which includes interest and capital repayments – all on a hypothetical house worth £250,000, the UK’s average house price.

Comparing the monthly repayments are as far as most people get when deciding on a deposit size. They notice that a higher deposit means lower monthly repayments. There’s a quite a difference between 5% and 25%, with 25% deposits paying over a third less each month. So higher is better, right?

Not necessarily. For one thing, finding an extra £2,500 seems a lot of extra money to have to save up just to reduce your monthly bills by £10 (as in the case of moving from a 10% to an 11% deposit). And looking at the monthly repayments is far too simplistic a way to choose the optimal deposit size. Here’s what we’d do instead.

You need to think about your deposit as an investment and calculate the different rates of return for each deposit size in terms of how much mortgage interest it saves you from having to pay. It might then be obvious that chucking an extra £10k into your house deposit is not worth it financially.

This table below looks at the marginal advantage of increasing your deposit size by 5% from one level to the next, in terms of Return On Investment. The interest rates that banks charge you move down in steps of 5% deposit sizes, so it makes sense to choose a deposit size in 5% increments.

A 10% deposit can get a 1.99% interest rate on a no-fee 2yr fixed rate mortgage. That’s a lot smaller than the best available rate on deposits between 5% and 9%, which is 2.79%. On a £250,000 house you’d save £2.1k in interest in Year 1 with a 10% deposit versus a 5% one. That is a 17% marginal rate of return on the extra £12,500 required.

A 17% return makes this likely to be the best investment you’ll ever make. If you can afford a 10% deposit, it’s therefore a no brainer. If you go higher than this to a 15% deposit, the extra £12,500 required will earn you a 7% return.

You might think it’s not worth the struggle to find an additional 5% deposit for a 7% marginal return on investment when you can get higher than this in the stock market. But remember – this is a guaranteed return.

Our workings show that a 20% deposit is not a good decision – you’d be better off stopping at 15%, since a marginal 2% return can definitely be beaten by almost any other type of investment. But what about somewhere in between like a 16% deposit?

Going for 16% instead of 15% only saves you interest on the additional deposit money – so a tiddly 1.69%, the same as the interest rate. Whereas choosing 15% instead of 14% has a huge difference, because it brings down the interest charged on the entire borrowed amount from 1.99% to 1.69%.

A 20% deposit is a bad decision based on these interest rates, but 25% looks ok. The decision must therefore be between a 15% and a 25% deposit. If we compare the 2, the marginal return on investment from the extra deposit money is 5%:

But is it worth saving up an extra £25,000 just to get a 5% return on it, when you can get better by investing that capital elsewhere?

For example, that £25,000 could be invested into a Buy-To-Let property, that might make you a 20% annual return. Your money is still invested in the property market, just a different set of bricks to ones you’re living in.

Our overall conclusion is that it’s worth going for either a 10% or a 15% deposit on your home, but no higher – and nothing in-between!

Current homeowners should be aware that you can retrospectively reduce the deposit size in your mortgage when you next rearrange your mortgage deal – often called equity release. Read more here. It might make financial sense to free up cash that’s not really helping you save much interest and reset your equity to 15%.

You should carry this exercise out yourself on your own specific mortgage options, as our example looked at just one type of mortgage, a 2-year fixed. Let’s next look at the different types of mortgages you can choose from.

Fixed, Variable Or Tracker?

This is the first thing you’ll need to choose and will depend on your attitude to risk. Fixed rate mortgages lock in an interest rate for typically 2-15 years and are the most popular mortgage type.

After this you can easily swap provider to another deal, or else fall onto what’s called the Standard Variable Rate – a bad idea, since it’s typically very expensive.

With fixed rate mortgages you know what amount you’ll be paying each month, which is good for budgeting, and also means you won’t be hit if the Bank of England raises interest rates because yours are locked-in. However, the interest rate you pay is typically higher than the other options, since you need to pay for the lower risk.

In theory, variable mortgages are meant to have lower initial interest rates than fixed mortgages, but often they don’t – here’s a fixed and a variable that both charge the same.

Variable mortgages are higher risk than fixed, since the bank can change the interest rate as they like. A more transparent alternative to variable mortgages are tracker mortgages, which are still variable but vary strictly in line with the Bank Of England base rates, as opposed to the whims of your mortgage lender.

Tracker mortgages can be agreed for a period of time, say 2-5 years, and there are even lifetime tracker mortgages available. A lifetime tracker locks in your interest rate above the base rate for the entire life of your mortgage, usually without Early Repayment Charges. They can be more expensive though as you get so much flexibility.

Early Repayment Charges are large fees imposed on you if you want to change your mortgage deal within an introductory period. Examples of when you might need to do this are an unplanned house sale, or if you want to release equity.

We also did the deposit size test on lifetime tracker mortgages and found that the interest rates were so high at the lower deposit levels that it made sense to go for a 20% or 25% deposit size:

How Long Should I Lock-In For Initially?

Most mortgages come with an initial term between 2 and 15 years. Using a fixed rate mortgage as an example, a 2-year fixed would lock-in an interest rate for 2 years, after which you’d be advised to rearrange your mortgage deal. But is it better to go for a short fix, or a long fix?

Short fixes of 2 years are better for those with an investor’s mindset, since the interest rates are lower due to the extra risk you take on by not knowing what interest rates will be like in 2 years’ time when you come to remortgage.

Here’s screenshots of a 2-year fix and a 15-year fix, each with a 10% deposit. The 15 year fix will cost you an extra £53,000 over the term, assuming rates stay the same – though rates likely will increase over the next 15 years:

Short fixes also mean you’re less likely to come foul of an Early Repayment Charge, as you can more easily work around life’s little surprises in a 2-year window.

I’d like to release a little equity from my house right now by switching provider, but I can’t without incurring a huge penalty because I’m locked into a 5-year fixed term. 

Repayment Or Interest Only?

Most mortgages on residential homes are repayment mortgages, and you don’t really have a choice in this except in special financial circumstances.

Interest-only are usually reserved for those in financial difficulty as an interim measure, or for the very wealthy with an approved future repayment plan in place. This is totally different to the situation with Buy-To-Let mortgages for investors, for which interest-only is the norm.

Repayment means you effectively make 2 payments a month, usually grouped together into one amount. One payment is the interest payment, determined by your interest rate. The other is to pay down the loan, determined by the length of the mortgage term.

Interest-only literally means you only make the interest payment – you do not pay off the loan.

Fees Or No Fees?

You’ll notice as you skim through price comparison sites that it’s a mixed bag of mortgages that charge either some product fees or none.

These are one-off mortgage arrangement fees, that are charged each time you arrange or rearrange your mortgage, which might be every couple of years if you choose to do 2-year fixed terms, for example.

You usually have the option of either paying them when you sign the deal or adding them onto the mortgage loan and dealing with them later.

This second option means you pay interest on the fees over the term of your mortgage, but the value of the fees themselves will depreciate against inflation over the decades, which may more or less offset the additional interest paid. On this logic, we would tend to add the fees to the loan.

What about those products that charge zero fees? Are they better?

Well, the ones that don’t charge fees tend to have a higher interest rate to compensate, so what you really need to look at is the total cost in the initial fixed period. Here, the one with the higher interest rate and zero fees has the lowest overall cost in the initial term:

How Long Should The Mortgage Term Be?

Many providers now allow you to take out a mortgage over 40 years. This is significantly longer than what used to be available. 25-year mortgages used to be the norm. But is there an advantage to a longer mortgage term? Or is it better to set the term short, so you pay your mortgage off quicker?

It’s much better to go long. Taking a short term of say 10-years ties your hands, meaning you have to pay huge monthly payments or risk defaulting on your mortgage. While a long term means you can still make large overpayments if you choose to, but you don’t have to.

Many lenders charge you if you make overpayments of more than 10% of your initial mortgage balance, but that means you could get away with making overpayments of 10% for the first 10 years of a 40 year mortgage, fully paying off the loan and incurring no fees.

Therefore, it’s better to get a long-term mortgage, reduce your mandatory monthly payments, and overpay if you want to. But don’t feel the need to overpay!

Realise that a mortgage is amongst the cheapest and most manageable debt you will ever have, and approaching it with an investor’s mindset reveals how it might be better to put your excess cash instead into other, more profitable assets, like buy-to-let investing.

What type of mortgage do you think is best? Join the conversation in the comments below!

Written by Ben


Featured image credit: fasphotographic/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Passive Buy-To-Let: These Property Investments Return 25% With Zero Effort!

We’ve talked before about the incredible returns you can get from owning rental property in the UK. What we want to talk about today is that if you wanted to invest in property, paying to outsource all tasks to do with sourcing, owning and managing them doesn’t really harm your wealth – and may even increase it.

Too often property investors think they have to be active landlords, doing everything themselves. They manage the tenants, fix the toilets, and find their own properties with no surveying or construction knowledge, often resulting in expensive problems down the line.

Meanwhile, if you’re willing to outsource every task, it means that all you need to become a property investor is money, and a basic grasp of the finances. It doesn’t even matter if you don’t live near the property.

Being a landlord is a job. We’re saying, don’t be a landlord – be a property investor!

In this article we’re going to run you through an example rental property for sale right now in Manchester, and show you the expected income, costs, and Return On Investment with it being run as an outsourced investment, versus a self-managed one.

You might be surprised how little difference it makes to your wealth, compared to the time you get back – time that you could put to better use making money elsewhere!

Be sure to check out the new Find Me A Property service for those wanting our help with buying rental property.

Alternatively Watch The YouTube Video > > >

The Key To Any Investment: Make It Passive

An investment should not require much of your time in order for it to grow. The advantage of an investment like a stock market fund is that you can set it up and forget about it, and return in 30 years’ time to see how it did.

Most property investors meanwhile put way too much time into bleeding their assets for every penny of possible return – they’re tempted to micromanage because they have full control over the asset and are reluctant to spend any money.

Many fancy apps and websites have popped up to make investing in property more passive by pooling investors’ money together into funds, but they are no substitute for the magnified returns possible by actually owning physical buy-to-let property yourself with a buy-to-let mortgage. And, the assumption that buy-to-let property cannot be completely passive is wrong.

Example House In Manchester

Let’s start with a real-world example of an investment-grade house that’s on the market right now.

On paper, it ticks all the boxes for me in terms of location, size, price to rent ratio, and condition, but I would visit it first to make sure. If you wouldn’t have a clue how to find the right property, remember, you can outsource everything – even that.

Below are the numbers for this particular investment, starting with the house price and the mortgage. We’ve found Natwest and RBS mortgages offering a rate of just 1.64% on a 25% deposit, which is the industry standard deposit size for buy-to-let mortgages. The mortgages have a £995 fee, which you can just add to the loan instead of paying upfront.

Example Investment: The Passive Approach

Next is the breakdown of what you’d actually pay for this opportunity (Upfront Investment column), having outsourced all the jobs of finding and purchasing the house to professionals. The vast majority of the upfront investment is the required deposit. The rest is all set-up costs that you must factor in to work out your true return. If this looks a lot to you, we’ll look at what you can do about that shortly.

Then there’s the monthly bills you’d expect to pay (Bills column), which assumes an agent fee of 12% on the rent, the once-in-a-blue-moon agent’s fee for finding new tenants shown as a monthly equivalent, and monthly equivalents for safety certificates and insurance.

The bills feed into your Monthly Returns calculation. Rental income is expected to be a healthy £900 a month on this property, and knocking off amounts for mortgage interest payments, bills, maintenance and void periods, you get a pre-tax rental profit of £410 a month. Annually, that’s a 10% Return On Investment against the £51,350 original investment.

But rental profit isn’t everything – you also expect to get a sizeable capital gain. Assuming your £160,000 property will be worth £168,000 in 1 years’ time, based on a historic 5% average growth rate, that £8,000 gain is an additional 16% Return On Investment. Overall, despite not being a hands-on landlord, you’re making a 25% pre-tax ROI.

A 25% ROI is pretty tasty, and that’s based on the premise that you’ve taken out all of the nasty time consuming work from being a rental property owner. Let’s quickly add that time and effort back into the equation and see what difference it makes to your ROI:

Example Investment: Doing It All Yourself

The blue cells are the costs associated with outsourcing that you can change. Let’s set the upfront outsourcing and the monthly agent’s fees to zero and see where that leaves you.

We’d also expect voids to increase if you were doing it yourself, from maybe 1 month a year to 2 months a year, since professional agents will likely do a better job of finding and retaining good long-term tenants – it’s what they do.

Your ROI has increased by doing everything yourself, from 25% to 29%. There’s hardly any difference – both are epic returns! The question you need to ask yourself is whether that 4% difference is worth giving yourself a second job over?

Outsourcing Options

As a remote hands-off investor, you’re going to need to outsource a lot of tasks.

In the buying phase, you’ll need:

  • someone to find and view properties for you;
  • a surveyor to check the roof, walls, windows and so on;
  • you may even want to use a mortgage broker to find you the best mortgage deal.

After purchase, you’ll need:

  • an agency to keep your house filled with tenants and answer the phone to all their problems;
  • maintenance people of all manner of trades to fix boilers, replace tiles, keep the paintwork fresh, perform safety inspections, and so on;
  • ongoing contact with mortgage brokers and insurers.

It pays if all of this can be coordinated.

Some property agencies will do that for you. They’ll find you an investment-grade property, arrange the mortgage, the solicitors, the surveyor, and the insurance, find you tenants, manage the tenant relationship, organise maintenance and ensure you don’t fall foul of safety regulations.

The only jobs for you to do are speaking with your agent, signing any paperwork, and having the final say on any expenditures.

We now have such a service on MoneyUnshackled.com. Head over to the Find Me A Property page and send us a message using the form there if you want help buying and managing a rental property.

Our trusted property sourcer can find you the same kind of house that I myself invest in, following the same strategy outlined above of cashflow plus capital growth.

They’ll hold your hand through the buying process, discuss investment strategy with you, tailor a plan for your needs, and crack on with finding you that perfect opportunity.

Why Property Works As An Investment

Property is such a solid investment for 3 main reasons: the way it’s financed, the stability of the market, and the cash flow.

These investments work so well because you’re using an interest-only mortgage to buy your property with. If you had the incredible good fortune to be able to buy outright with cash, you’re ROI would plummet from 25%, to 9%.

A 9% return is still good, and is comparable to the stock market – but the property returns are only so high in our examples because I knew how to find a very good investment-grade property.

Most people wouldn’t know how to do that. That knowledge gap is why many landlords are being forced out of the market right now due to either making losses, or profits that are too small to justify the risk and effort. But regardless, financing a property right should magnify your returns.

Historically, the property market has been extremely stable in comparison to the stock market, due to the nature of the asset – ordinary people need to live in them, and there’s always more demand than supply, so it’s very rare for prices to crash.

Property vs Stocks: Price Movements

Above are the last several years for example – stock prices move wildly, while property moves much more smoothly. While price instability isn’t a major concern for a long-term strategy, a smooth gradual upward price journey can be reassuring to more risk-averse investors.

Finally, the properties we’re looking at here cash-flow very nicely, with over a third of the profits being cash in the bank as opposed to theoretical capital growth. You can spend that money on your lifestyle, or to replace a job income, or to easily reinvest into more assets.

The Most Common Worries Are Easily Solved

The main downsides to buy-to-let are government meddling, tenant issues, and the large upfront investment amount required. Looming interest rate rises are also a common worry.

Let’s quickly deal with the first ones – keeping on top of ever-changing government regulation and tenant issues. These are both easily resolved by employing a property agent to run the day-to-day for you. Using a good property sourcer will also allow you to avoid buying a house in the first place that will need expensive renovations to meet upcoming law changes.

Off the top of my head, there’s a big one coming in 2030 that states that all rentals must have an energy rating of C or higher – not many older properties will be up to code without a fair bit of expenditure on insulation. The trick is in finding the good ones, or spending money smartly to improve the ratings just enough.

But the government comes up with new doozies like this all the time to keep landlords on their toes. Having someone on the end of the phone to advise you is invaluable.

Next, the upfront investment amount is typically a huge hurdle for most people. There are ways to effectively borrow more on your home residence to free up spare cash, called equity release that we’ve discussed previously, that a good mortgage broker will be able to help you arrange. Or you can go halves with a mate. Or you can even keep buy-to-let as an aspiration that you have on your radar until you’ve saved up enough.

Will Returns Continue To Be 25%?

That 25% we quoted for a passive investment was of course based on the current market, and a lot can change. But that doesn’t have to mean “change for the worse”.

Rents are skyrocketing right now, which is great for existing landlords, and helpful for new investors to the market as increasing rents offset the increases in property prices to maintain a high ROI. And if you jump into the market now, you can hopefully continue to ride the wave of rental price increases for years to come.

One big turd in the punchbowl though is interest rates. We don’t believe interest can rise all that much without every homeowner with a mortgage in the land being instantly bankrupted – not to mention the government’s own debt, who’s interest payments would rise by a painful £25bn a year for every 1% rise in interest rates.

The Bank Of England knows this, and will not want to take a course of action with interest rates that will sink the whole country.

Using the same logic as before, if rates rise by 1%, the 25% ROI drops to 23%. If we raise interest by 2%, ROI drops to 20%. If we raise interest by 3%, at which point the whole country is probably bankrupt, your ROI drops to 18%. The country may be screwed at this point, but you’re probably doing ok – thanks in part to the capital gains.

We think steady house price growth is still a reasonable expectation for the long-term going forwards. During the high-interest 1970s and 80s when the Bank of England base rate for interest peaked at 17%, house price growth was frequently in the double-digits. And in entirely different circumstances, in the 12 months to September 2021 houses have grown by 10%.

‘Property Investors’ Are Richer Than ‘Landlords’

Finally, if you’re still not sold on outsourcing everything, think about the money you could make with the time saved from not having the second job of being an active landlord.

They say time is money, and if you’re saving hours a week, there’s other stuff you could be doing to increase your income beyond having a property administration job. Or you could just, you know… enjoy your free time!

What do you think about outsourcing everything to do with property? Join the conversation in the comments below!

Written by Ben


Featured image credit: ranjith ravindran/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Runaway Inflation – Will The ‘New Normal’ Ravage Your Portfolio

Since 2008, major central banks have pumped over $25 trillion into the global economy, with over $9 trillion in response to Covid-19 alone. Around half of that has come from an America that is addicted to money printing, doubling their magic money tree from $4trn to $8trn during the pandemic.

These are astonishingly huge sums. The thinking goes that all that extra money sloshing around, along with record low interest rates, may have already pushed stocks to unsustainable highs. But is this the calm before the storm?

The UK consumer price index, which measures the cost of a typical basket of goods and services, flew up from 2% in July to 3.2% in August, and it’s forecasted to keep climbing.

In America, the Biden money-printing could “set off inflationary pressures of a kind we have not seen in a generation,” wrote a prominent figure in Biden’s own party. Bank of America estimates that the U.S. government will have spent $879m every hour in 2021. The results could be devastating.

The shut-down of the global economy and subsequent policy responses have us teetering on the brink of a period of runaway inflation. Whether or not it happens will depend on the competency of Western politicians to fight it – the same politicians, incidentally, who got us into this mess in the first place.

So, assuming they cock it up, what impact will runaway inflation have on your investments and home finances? Let’s check it out…

And the end of the article we cover the best investments to defend against runaway inflation, along with the best places to buy them. Offers for all of these investing platforms are available on the Money Unshackled Offers page.

Alternatively Watch The YouTube Video > > >

Panic In The UK

There are lots of reasons to be startled by the latest inflation figures. A CPI of 3.2% in August not only puts it at the highest level in nearly a decade, but the month-on-month change from July to August is the biggest increase since the CPI was introduced as a measure of prices in 1997.

That’s high, but fine if it’s a temporary thing. We know the world has gone mental recently, and crazy economic statistics are becoming the norm in 2021.

But what if it’s not temporary? There are still inflationary pressures heading down the tracks, including a massive shortage of truck drivers set to result in food shortages and increased prices over winter. There’s even talk of Christmas dinner being cancelled for all but the wealthiest of families due to the shortages. All this continuing pressure on prices may cause high inflation to become “sticky” – meaning it hangs around for the long-term.

It’s now looking like the best outcome would be inflation rising to just 4% by the end of 2021. And that’s double the target rate of inflation desired by the UK’s central bank.

Across the board, prices are rising far faster than usual. In the past few months, the wholesale price of electricity in the UK has almost quadrupled from £40 to £160 per Mwh, spiking in the past fortnight to the highest level on record.

It is widely predicted that due to a shortage of gas and greater reliance on expensive green energy that we are facing further sharp increases in both electricity and gas bills in the coming months.

The Bank of England warned earlier this year about a “nasty surprise” coming our way. They’re right to be worried. An inflationary spiral, where prices rise ever higher, is what inflamed the economic instability and high unemployment in the 1970s, an ordeal which took many years, if not decades, to recover from.

House Prices Through The Roof!

The CPI measure of inflation doesn’t include the cost of buying homes. If it did, we would see a far higher figure for inflation.

The latest house price inflation data runs to July 2021, and shows house prices up a massive 8% annually, reported as a good thing by the press because that’s down from an even higher 13% in June.

“Ah, but this is due to the meddling of the UK government in temporarily relaxing stamp duty”, I hear you say. But that’s not the whole story.

Over in America, the median sale price of a home rose 22.9% in the year from June 2020 to June 2021, smashing all records. And this obviously has nothing to do with relaxing stamp duty in the UK.

The so called ‘new normal’ of home working, combined with low interest rates, has massively increased the demand for homes.

Where before 3 or 4 people would be content in a house share, they all now want their own space. But new houses are not being built fast enough.

These same economic forces are at play in the UK. House prices are creeping up, and up, and up, stamp duty holiday or not.

Is Inflation Good Or Bad For Investors?

Inflation means the prices of things go up… so good if you own assets… right? Well, inflation typically refers to the price of consumer goods, not investment assets, and is in fact one of the main reasons you need to invest – to try and beat inflation. A higher rate of inflation makes that task more difficult.

There is inflation itself; and then there is the government response to it.

If inflation gets too high, governments will try to squash it back down. This could include raising interest rates or cutting back on the money printing… or both. Doing either is bad for investors.

Increased Interest Rate

Increased interest rates are bad for leveraged investors, such as landlords with mortgaged properties, because their loan interest costs go up, and there are fewer people in the market who are able to afford to take on debt to buy your assets from you, reducing their market prices.

Increased interest rates are bad for owners of stocks too, because the businesses they are invested in have increased costs of borrowing, reducing profits, and with them, dividends and stock prices.

Cutting QE

It’s widely accepted that ridiculous levels of quantitative easing are responsible for record high prices in the stock and other asset markets.

Pumping cash into the economy makes cash less attractive, and pushes up the prices of assets like stocks, bonds, property, gold, crypto, and so on.

To fight inflation, central banks could claw back some of their money printing. When they magic money from thin air, central banks like the Fed typically lend it to the government in return for government bonds. In 2019, the Fed was selling down their holdings of these securities, reducing the amount of cash in the economy. They would need to try doing something similar now if inflation got out of hand.

Taking cash out of the economy would make cash more attractive again, moving money out of stocks and other investments and reducing their market prices.

High Inflation Impact On Stocks

High inflation itself also drives down the profitability and growth potential of companies, and hence share prices. Fewer customers can afford to buy products, and the costs of materials and labour go up.

And if inflation suddenly goes from 2% to, say, 4% very quickly, investors will want a higher return to compensate. The stock market will likely drop as a result to give investors that extra value.

Is Inflation Ever Good For Stocks?

Inflation is not all bad. Some inflation can be beneficial. Mild inflation is generally good, because it’s a sign the economy is growing, and businesses can raise prices.

“When examining S&P 500 returns by decade and adjusting for inflation, the results show the highest real returns occur when inflation is 2% to 3%,” says Investopedia. That’s about where we are now. So, a modest amount of inflation is in fact a good thing.

High Inflation Impact On Investment Property

We’ve mentioned how a government response to inflation could push up interest rates, putting the boot into the ribs of hard-pressed property investors and homeowners alike.

But the run-up period of inflation before this will likely send your properties’ prices soaring.

As an owner of multiple properties, I’ve been rather enjoying the recent double-digit inflation in the housing market. But it must be a bitter pill to swallow for new investors.

This initial inflationary boost to your equity may provide a cushion that helps to counteract any negative fallout if interest rates do go up.

Savers May Be Glad… At First

Savers may initially rejoice at a raising of interest rates, as they watch their high street savings account go from a 0.5% rate of interest to perhaps a 2% rate of interest.

That joy will turn to ash though when they realise that inflation in the shops has gone up by more than this, meaning their actual real returns are EVEN MORE negative than they were before. No matter how high inflation gets, central banks can only increase interest a LITTLE, or risk collapsing the economy.

Presumably cash savers are 100% reliant on their job for their income too, as opposed to investors who may own passive income generating assets.

We are all familiar with the pathetic 1% annual pay rises in the UK. When inflation is 5%+, but wages are stagnant, how will cash savers be able to keep building their wealth?

High Inflation Impact On Bonds

Holders of fixed income securities like bonds do poorly in a high inflation environment, because that fixed income has less and less purchasing power, driving down the price of bonds. Higher interest rates on newly issued bonds drives down the value of existing bonds as their lower coupons are less attractive.

How To Defend Against Rampant Inflation

So, stocks overall do poorly in a high inflation world, as do bonds, as does cash, as does property. So where exactly can we store some of our wealth to help defend against runaway inflation?

Many investors, including us, believe gold offers protection from long-term inflation. Gold is a store of value: its supply is limited, unlike cash which can be magicked in and out of existence.

Also, its history doesn’t lie. We see below how the gold price shot up in response to inflation in the 1970s, then loosely tracked it. In 2008 there was a massive correction in gold’s favour when people lost all faith in cash following the 2008 crisis and the resultant quantitative easing. During the pandemic, gold has shot up again when the banks once more fired up the printing presses, ahead of the inevitable inflation wave that is now hitting us.

We buy gold through the iShares Physical Gold ETC, and it’s free to trade on platforms like Freetrade, Trading 212 and InvestEngine. If you buy your gold through any of these platforms, new customers will get free shares worth up to £200 or a £50 welcome bonus.

Cryptocurrencies like Bitcoin, in theory, should do the same job as gold. They have similar qualities to gold in that there is a limited supply, and they are beyond the reach of meddling central bankers. But unlike gold, we can’t prove this hunch with a nice historical graph because, well, there is no history!

New users to Coinbase, one of the most popular crypto trading platforms, will get some free Bitcoin when you sign up using this offer link.

You can also hedge against rampant inflation by investing in certain stocks that benefit, or at least are not disadvantaged, by a high interest, high inflation environment.

These include:

  • banks like HSBC and Lloyds (who love it when interest rates on their loans can go up);
  • big blue-chip stocks like Coca Cola that sell everyday essential products and have little in the way of debt;
  • quality high-dividend stocks like British American Tobacco, who have a history of growing their dividend in real terms.

Grab a free trial subscription to Stockopedia here to get a full analysis of these stocks, and thousands more. The link also gets you a 25% discount on a paid subscription.

Are you worried about runaway inflation? Or are you upbeat about the economy? Join the conversation in the comments below!

Written by Ben


Featured image credit: Brian A Jackson/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

How To Release Equity From Your Home To Get £50k+ In Cash

Imagine transferring £50k of extra cash into your bank account, without having to work to get it. Think what you could do with that money. The world would be your playground. This is what I did in my late twenties, and by investing the cash wisely, it transformed my life.

The way I did this was with equity release. Equity release is the popular name for products that provide homeowners with a way of releasing wealth tied up in their property, without having to downsize and move house. I got £50,000 out, but you might be able to get much more.

Your ‘equity’ is the difference between the value of your home and any mortgage you might owe. Equity release can give you access to some of this money, which would otherwise stay tied up in the value of your property.

If you’ve owned your home for even a handful of years, it’s likely that the property may be worth considerably more than what you first paid for it. On average, UK house prices increased by 17% in the five years to 2020, and are up a further 6% in the first half of 2021 alone! This could mean that you have an enormous sum of money locked away waiting to be accessed.

Here we’ll explain how equity release works and show you the different options available to do it no matter your age.

Maybe you dream of home improvements or a holiday, or maybe you intend to live off the money. For us, we’d use the cash to buy some income generating investments. Whatever you’d like to use the money for, equity release will help get you there. Let’s check it out!

Another way to make easy money for minimal effort is with Matched Betting, a step-by-step technique to profit from the free bets and incentives offered by bookmakers. It can make you £500+ every month for less than an hour a day of effort.

Go to the Matched Betting guides to find out more, and for all the latest offers.

Alternatively Watch The YouTube Video > > >

A Plan For Any Age

Traditionally, equity release products are aimed at the over 55s. A specialist industry has grown in this space, with a very interesting range of products aimed at lump sum and regular income withdrawals.

But if you’re younger than 55, fear not: I just told you that I’ve already done this, and I’m 33. But if you’re over 55, or you can wait until then, the specialist products for this age group – known as Lifetime Mortgages – are tailor made for this job, so are worth prioritising.

For Lifetime Mortgages, the most common qualifying criteria are:

  • The youngest homeowner is 55 or over;
  • You own the property, either outright OR with a mortgage;
  • The property is worth more than £70,000;
  • If you have a mortgage, you will have to pay this off with the money you receive from the equity release.

If you’re under 55 this option is closed to you – to release equity, you’ll just need to be able to qualify for a regular mortgage on your house’s current market value.

How Much Equity Can You Release?

This comes down to your property’s value, and if you’re under 55, your income. For Lifetime Mortgages, your age is also factored in, and with some providers, your health.

The two times I have released equity, the gap had widened between my mortgage amount and the value of my home. This is due both to monthly mortgage repayments reducing the size of the loan, and to market prices pushing up the property value.

With the specialist products for the over 55s, the amounts you can release are much more clearly defined.

For Lifetime Mortgages, typically you can release between 20-50% of your property’s value. The older you are, the more you can release. You can withdraw even more than this with a product called a Home Reversion Plan: more on this soon.

In terms of timeframe, most equity releases take between six to eight weeks to complete.

What It Costs

Let’s be clear: most equity releases result in an increased mortgage amount against your property. As such, there is a cost. The main cost is the annual interest on the loan, currently around 2.5% on Lifetime Mortgages, fixed for the rest of your life.

If you’re averse to debt, this might sound expensive, especially the “for the rest of your life” part, but consider that 2.5% is essentially the same as inflation. Your property is likely to grow even faster than this, based on historic property growth rates of 5-7% annually.

And it depends on what you are using the cash for. If you choose to invest it over the long-term, 2.5% is perhaps a small price to pay for the rate of return you could get from the stock market for example, typically between 8-11% historically.

There will be some other upfront costs, including loan arrangement fees typically in the region of £1,000 which can be added to the amount you’re borrowing, and any brokers and solicitors’ fees for sorting this all out, which will typically add up to another grand or so.

The Specialist Products: How Lifetime Mortgages Work

Lifetime Mortgages are a growing but relatively unheard-of industry, serving only 500,000 UK homeowners since 1991. Barely anyone has taken advantage of these life-changing products!

If you take one on, you have the right to remain in your property for life, or until you need to move into long-term care: you can’t be evicted by the bank. You also have the right to move to another property so long as your new home is suitable collateral for continuing the arrangement.

With equity release, monthly repayments aren’t necessary. You can choose to enjoy the money now, and let the interest be taken from your estate upon the sale of your property, typically after you and your partner have passed away.

Alternatively, if you decide to pay the interest each month, your loan balance remains static.

Finally, with a Lifetime Mortgage you get an amazing feature called a “no negative equity guarantee”. You don’t get this with a normal mortgage.

A “no negative equity guarantee” means that when the property is sold and all selling fees paid from the proceeds, EVEN IF the amount left over is not enough to fully repay the loan, the difference will be written off. Sweet!

The Different Types Of Equity Release Products

First let’s look at the different products available in the equity release market for the over 55s, and then we’ll look at how you can manufacture your own equity release by using normal mortgages, regardless of your age.

#1 – Lifetime Mortgage

If you want to release a lump sum of cash up to 50% of the house’s value, a Lifetime Mortgage could be for you.

There is no requirement to make monthly repayments, as the amount you release, plus any interest, is repaid from the proceeds when the property is eventually sold. You can choose to pay towards the interest if you like, for those worried about leaving a more intact inheritance to their heirs.

#2 – Income Lifetime Mortgage

This one is really interesting because it allows you to turn your home into an income stream! An Income Lifetime Mortgage gives you flexible access to your equity. Rather than releasing a lump sum upfront, you can release your cash over time as a regular income.

If the value of your house is expected to go up by X amount each year, you might decide to withdraw that amount, less the interest cost and perhaps less inflation too, as an income each year.

Think about it! You can add an extra income stream to your other retirement incomes, without depleting your home equity!

#3 – Home Reversion Plan

This is an option for those who really need the cash. With these, you can take out even more equity than with a Lifetime Mortgage, typically up to around 60%. But it comes at a terrible price.

In exchange for a lump sum worth 60% of the value of your home, you would be signing over the entire ownership of your house to the product provider. Not the best of deals. But, you would not be taking on any debt, and you would get the right to stay living in the property for your lifetime, so this will no doubt appeal to some people.

How To Do It Yourself If You Are Under 55

If you are under 55, the only way to release equity from your home – other than moving house – is to get clever with how you use normal mortgages.

I’ve done 2 equity releases on my house over the years. Here’s what I did the first time. I ran a quick calculation to make sure that the finances worked, which was as follows:

  • I got my house valued for free by Yopa at £230,000. I was confident then to start the formal remortgaging process, as you need the bank to agree with your desired valuation. They did, and also valued it at £230,000.
  • I knew the new mortgage would be around £207,000 at a 90% LTV. The bank would pay this amount to my solicitors, who were provided by the bank as part of the service.
  • My old mortgage would need to be paid off by the solicitors, at £179,000. This would leave the solicitors holding nearly £28,000, payable to my bank account.

So I pushed ahead with the plan, and received nearly £28,000 in my bank account a few weeks later.

Was It Worth It?

We’re not suggesting you release equity to squander the money on frivolous things like holidays or fast cars. Although you could.

I put the released equity into a buy-to-let property, the expected investment returns on which were 20% annually. Minus the additional interest payments from the equity release, the net annual benefit was £3,600.

If you ever plan to release equity, you want to be able to do so on your schedule and at the opportune moment. If there is an Early Repayment Charge on your existing mortgage, you would either have to wait to be clear of the fixed-term period, or pay the price. I had to pay an ERC to break contract when I did this, but it would have been unnecessary if I had avoided a long fixed period in the first place.

Things To Consider

The new lender may ask you what you plan to do with the money. While we think it’s really none of their business, it’s best to be honest.

Banks are usually uncomfortable with the thought of you investing your borrowed money, when you could be spending it all on a holiday like a normal person. It’s a strange world we live in.

Here’s where using an independent mortgage broker comes in handy, as they will know how best to circumnavigate any uncomfortable questions in the application process.

And if you’re going for a Lifetime Mortgage, a chat with a financial advisor who specialises in these products would be sensible too.

It’s also worth remembering that just selling up and moving to a cheaper property could be a simple alternative to equity release, resulting in a similarly large lump sum of cash. This might be done through downsizing, or by moving to a part of the country with lower house prices.

For Lifetime Mortgages, releasing funds in your lifetime that would otherwise stay tied up in your home until you pass away will reduce the size of your estate for inheritance purposes. Lifetime Mortgages aren’t designed to be repaid in your lifetime.

Finally, consider what your life could be like with a huge injection of cash at just the right time.

Equity release changed my life: it bought me a couple of extra sources of income from investment properties; as a cash buffer, it gave me the confidence to quit jobs with nothing else lined up; and it eventually let me quit my career altogether and go full time on YouTube. What will it do for you?

Have you ever considered releasing equity? And when you’re over 55, would you draw an income from your home? Join the conversation in the comments below!

Written by Ben


Featured image credit: Dean Clarke/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Saving A House Deposit Or Building Your Investment Portfolio: Which Comes First?

Getting onto the housing ladder is becoming increasingly difficult. In fact, latest figures show only 50% of all 35-44 year olds had a mortgage, down significantly from 68% in 1997. When this dataset is next updated by the ONS, the decline will no doubt be even worse.

At the same time, people in their 20s and 30s are becoming more aware than ever of the importance of investing for their futures.

Unfortunately, the state pension is unlikely to exist in its current form for them, and gone are the days of final salary pensions. If you’re not investing from a young age, your future is looking grim.

Investing and home ownership are both worthy financial challenges to tackle, but the 2 goals are conflicting. How can you save up for a house deposit, AND invest adequately for your future?

Which target should you prioritise first? The roof over your head, or avoiding a miserable retirement?

Today we’re going to try to solve this problem facing the majority of young people, on which goal to tackle first from a financial perspective. Should you save for a house or invest in the stock market?

And if you’ve already saved up for a home, has the missed opportunity of many extra years of compounding investment returns done irreparable damage to your investing potential?

If you’re new to investing and want the professionals to manage your money, a great option for hands-off investors is to open a Stocks & Shares ISA with Nutmeg. They also offer Lifetime ISAs to help with saving for a house deposit.

New customers who use this special link will also get the first 6 months with ZERO management fees. If you’d rather manage your investments yourself, check out our hand-picked range of ‘do-it-yourself’ Stocks & Shares ISAs, here.

Alternatively Watch The YouTube Video > > >

A Growing Problem

The dilemma facing young people about whether they should start investing or save for a house deposit is getting more obvious with each passing year.

Firstly, investing is now more accessible than ever. You can now invest on many platforms without fees, and with minimum investments as little as £1. Information about the stock market is plentiful, is easily accessible and is free on places like YouTube.

Investing has been made omnipresent and accessible to the point that anyone can pick up a phone and buy some stocks.

This openness has removed a barrier that previously would have stopped most people from even considering investing, and made young savers think that maybe they should be abandoning the decades long attempt to build a house deposit and build a financial future through stocks instead.

However, at the same time, the prospect of ever owning a house is receding into the distance. House prices have gone up by an average of 5.2% over the last 20 years.

Why is this a problem? Because that is MUCH higher than wage inflation, which has averaged just 2.8% a year over the last 20 years. Incomes are not keeping up with the rate that house prices are increasing.

While you’re saving, house prices are going up in real terms. So more and more it feels like if you don’t try and buy a house right now, you’ll never get a better chance.

Why Not Do Both? Couldn’t You Whack Your House Deposit In The Stock Market?

Seems reasonable right? You’ve got a lump sum of cash just sat there idling in the bank while it slowly gets added to from your saved wages. Why not take it out, invest it, and get to your goal quicker?

Many people do this, and there are certainly success stories – but the same can be said of people who put it all on black on the roulette wheel.

The stock market can go up as well as down in the short to medium term, so we would not advise anyone to put their house deposit into the stock market unless you don’t plan to buy a home for at least 5 years, and preferably longer.

Otherwise, there’s a good chance you could have lost money on your house deposit at the point when it’s needed. It’s therefore usually best to keep the 2 goals separate.

3 Reasons To Save For The House Deposit First

#1 – A House Can Be An Investment

Your home is not an investment in the traditional sense of the word – a house costs the owner a fortune to maintain, and any capital growth can’t easily be accessed unless you decide to sell up and live on the streets.

But there ARE ways you can make the house turn a profit, by charging other people for the use of your assets.

The usual thing to do is to get a live-in lodger or two, or do Airbnb. A couple of lodgers paying rent could easily cover the cost of your mortgage and eliminate your biggest cost of living – a great investment.

But you can also rent out your driveway for day commuters; let someone park a mobile home or trailer on your land; or lease out your garage, attic, and spare room for storage space.

A house can also be a great investment if you geo-arbitrage it. This is when you intend to sell up the house in the future and move to a less expensive area.

Maybe you’ve managed to get on the housing ladder in London and can afford it due to your high London banker’s salary, but could see yourself retiring to Yorkshire. You might one day liquidate a £1m townhouse to buy an equivalent sized semi in Leeds for £300k.

#2 – The Emotional/Cultural Need

For most people in this country, home ownership is a defining feature of whether or not you’re a proper adult. This is an aspect of British culture, where 63% own their homes. This is down from 71% in 2004, when buying a house was much easier.

On the continent they are not as fussed as we are about this. The Germans and Austrians quite like to rent, with only 51% and 55% respectively owning homes. The Swiss care even less about home equity, with just a 42% rate of home ownership.

On this channel we don’t think whether you own a home or not defines you as an adult – having an investment portfolio and choosing to rent is just as valid a life-choice. Nor do we buy into the myth that renting is dead money: check out this article next on the merits of buying vs those of renting.

But if you’d sleep better at night by keeping up with the Joneses, then buying your home first is the right choice for you.

#3 – Investment Returns Don’t Matter So Much Initially

If you’ve got 2 or 3 grand and you’re stressing about where to put it… don’t. Your investing returns are likely to be miniscule in terms of pounds and pence, compared to what you’ll be able to make one day when your pot is much larger.

When you’ve got a decent sized house deposit built up, this might be a different story. If you’re enjoying this content, give us a big like to let the YouTube algorithm know that this video rocks! You can also show us some appreciation with the new Super Thanks button below.

1 Big Reason To Focus On Investing: The Compounding Boost Is Insane

First-time buyers now need an average of £59,000 to get on the property ladder, a 2021 report by Halifax bank has revealed.

That’s up £12,000 from the previous year. This is the national average: in London, first time buyers need an average deposit of £133,000!

Those numbers are huge, and represent many years of saving hard. How many years? A lot. ONS data tells us that of people between the age of 22 and 29 years, about 40% have not yet managed to save anything at all, while around 10% have savings of between £2,000 and £3,000. Only around 25% have saved more than £6,000.

And £6,000 is the also average savings for people aged between 35 and 44. Clearly saving for a house deposit is now a decades long task for most people.

These are decades that you can’t afford to be wasting sitting out of the stock market. Let’s assume money flows naturally to you, and it takes you only 10 years to save for a house deposit, from age 20 to age 30. You save £6,000 a year towards a £60,000 deposit.

Example 1 – Buy House First (Save During 20s)

Here’s how much money you could have when you retire at age 60 if you only started investing into the stock market at age 30, once you’d sorted the house deposit. Keeping it simple we’ll assume you continue to be able to invest £6k a year, or £500 a month, at 6% after-inflation returns. This gives you £500k at retirement, enough to draw an income from.

Example 2 – Invest Instead & Never Buy A House

Now here’s what happens if you choose never to buy a house, and you’d been able to start investing in the stock market from age 20, with an extra 10 years of compounding: you retire with £1m at age 60. The money you had put away in your 20s accounts for HALF of your ENTIRE retirement wealth. That’s the power of compounding over time.

Example 3 – Invest First (Invest During 20s, Save For House During 30s)

If you instead decided to delay buying your first home until you were 40, what effect would that have on your investment pot? Well, you’d be able to invest for that important first decade, which following on with our example provides £494k of after-inflation net worth to your retirement funds.

You then take a decade off from investing between age 30 and 40 to save for a house deposit. Your initial investments are cooking away merrily during this time.

Bear in mind that your required house deposit will likely be higher by then. If houses increase in value by 3% above inflation annually over 10 years, your required house deposit would move from an average £59,000 to £80,000 in REAL terms; a third higher. And a higher house price likely means higher mortgage payments and a reduced ability to invest.

Then you resume investing at age 40, and are able to build up to a further £231k over the next 20 years from your contributions plus growth. This assumes your mortgage repayments didn’t increase.

This amount takes you twice as long to attain, for half the end value of the money you invested in your 20s, again demonstrating the importance of investing early in life. You could end up with £725k, much higher than the £500k you would have got by saving for a house first. But even though your investments are larger, you’d still have a small outstanding mortgage at age 60.

But It’s Good To Own Property, Right?

Unless you’re planning to access the equity in your home by moving to a cheaper city or downsizing later in life – most people don’t – the growth in your house’s market value doesn’t really matter for your finances. Only the size of your initial deposit matters.

You’ll always need a roof over your head – you can sell your house for more, but your next house will cost more too as a result of the whole property market going up together.

Our Preferred Order

Before you set money aside each month for your house deposit, earmark some for investing on a small scale. If you can afford to save £500 each month in total, maybe you just invest £100 of that.

The goal is to learn while the stakes are low, with a large enough amount for you to care about how the investments perform, but not enough to get in the way of your other objectives.

You should always have an investment account even if it only holds a few hundred quid, so you can spend your formative years figuring out the stock market. Like anything worth doing, investing takes experience and time to perfect.

Ramping up your commitment to investing earlier means you get to experiment and make mistakes while your pot is small and it matters less. Once you’re older with a family, a mortgage, and responsibilities, you’ll be too scared to start once you have more to lose.

With your remaining savings you can save for the house deposit if that goal is on your dream-list. When the house is bought, every spare bit of cash you have should be going into building your investments. Nobody cares more than you do about your retirement, least of all the government. Your future finances have to be YOUR priority.

Which do you think should take priority – saving for a house, or building a freedom fund? Join the conversation in the comments below!

Written by Ben


Featured image credit: Dean Clarke/Shutterstock.com

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