To clarify, the government are proposing raising €470m per annum over the next 4 years
by imposing a levy of 0.6% on all private pension funds.

This levy will be imposed on the total of your fund and not just the contributions of a
given year, therefore a fund which has a present value of €100,000 would be hit with a
levy of €600 – and assuming this fund rises over the period so will the levy.

Now let us take the maths on this a little further and assume the following

1) You are now 66 and retiring
2) You are on a salary of €69,000 having grown by 4% per annum over the last 40
years
3) Through your company and your own contributions you have invested 10% of
your salary each year for the last 40 years
4) This fund has grown by net 5% per annum and now stands at €352,000
5) With an annuity rate of 6% you can get a pension of €21,120 per annum
6) With the new pension levy this will reduce to €20,993 per annum a reduction of
€127 for each year of retirement

NB: The above may not seem a lot however, should you wish to achieve the pre-levy
pension in the above example you would have to work an extra 16 weeks! So cancel the
party till after the summer…….

What makes this levy even more ludicrous is the fact that the majority of defined benefit
schemes in the country are struggling and this levy will only push them further away
from meeting the pensions for the members/employees.

Politicians are always vocal in their support for the elderly and fear reducing their
benefits because of a backlash in the polls – this proposal will affect those retiring now
and in the future and should be opposed by one and all.

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It is a big decision.  But here are two things to consider:

Renting is dead money

If you are currently renting a property you are essentially giving money away (albeit in return for a roof over your head!) every month.  If you can afford to buy a house, that is afford the deposit, afford the repayments and your current and future financial circumstances are stable and known, consideration should be given to buying a house.  For if you do, you will then start to pay money (your mortgage) and ultimately you will own that asset (your house).

2011, the year of good Mortgage Interest relief.

If you are a couple, and you buy a house this year, you can get back up to 416 euros in mortgage interest relief every month. Tax relief is available for up to 7 (SEVEN) years after taking out a mortgage

The maximum qualifying interest amount for a first- time couple is €20,000. In year one and year two of purchasing, the maximum interest relief is 25% or €5,000 annually. This reduces to €4,500 in years three, four and five and to €4,000 in years six and seven.   This means that a first-time buyer who purchases a home up to and including the 31 December 2011 will be in line to qualify for up to a massive €31,500 over a seven-year period.

Now contrast this to buying a house in 2012.  Mortgage interest relief per month for a couple is only €75 per month.  So over 7 years, you can get back up to 6,300 euros.  In 2013, it gets worse, mortgage interest relief is going to be abolished!

Summary

So if you are considering becoming a first time buyer and getting that first time buyer mortgage, 2011 could be there to do it.  If you think prices may drop further, perhaps wait a while, but if you want to buy a house and can afford it, you should maybe consider taking the plunge sometime in 2011.

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Step 1: Decide what you can afford to pay

What can you afford for both your mortgage deposit and monthly mortgage repayments?  What if your circumstances change for example, you get sick or you lose your job, do you have a contingency plan?  Will you still be able to make your repayments?

Step 2: Where do you want to live?

Round the corner from your Mum and Dad?  Near your friends?  Next to the pub?  These maybe are issues that some people might have, but perhaps you should be thinking longer more and about more pressing issues.  For example, what is the neighbourhood crime rate?  How good is public transport?  How close am I to schools and hospitals?

Step 3:  What does my house need?

Consider what is important you.  Do you need a downstairs and upstairs toilet?  Do you need a garage?  Is a garden important?  Is a terraced house fine or do you not want to be that close to your neighbours?!

Step 4:  Where do I start looking for my house

There are lots of property websites like Daft and MyHome.  You can search for properties based on many of the things you decide above and with a few clicks start viewing potential properties.  However, nothing beats walking around / driving around an area you are interested in living in and getting a hands-on feel for a place.  Visit during the day and night.   Make sure you are happy with where you might be living for a number of years to come.

Step 5:  Narrowing down the search

So perhaps you have now found a few houses you really like.  The next step is to go see them.  One of the most important things is if you like a house, go see it more than once.  If you know a handyman, or a builder or an architect, bring them along for their professional advice on the property.  You don’t want to fall in love with your dream house, only to find it needs thousands of euro of unexpected work done to it!  If you don’t have this expertise to call upon, at the very least at this stage, bring along a family member or a friend for their considered opinion.

Step 6:  The next  steps…

Following the above advice will help focus your efforts.  You still have a long way to go!  Bidding and buying, Applying for a mortgage, legal fees, mortgage protection, the list is long.  It does not have to be painful though.  By using the services of an independent financial advisory firm like All Financials can take away a lot of the headache.  So talk to me, or someone like me today and let me help you become that first time buyer.

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However, I remembered that the client got a tracker mortgage at the time so as an exercise I decided to do a bit of work with regard to the figures and came up with some interesting conclusions:

Purchase February 2008

* House Price – €575,000
* Mortgage at 92% – €529,000
* Max term (against ages) – 33 years
* Mortgage Interest Rate – 0.95% Tracker with First Active
* Current Mortgage Repayment €1,812.50 pm (gross)

Now if we assume the client is moving into a house on the road and it is going to cost €405,000 (needs a bit of work). Like the last time they are going to look for a 92% loan. As he and his partner are 3 years older their max term is reduced to 30 years. They have decided to stick with First Active (now Ulster Bank) and are availing of there variable rate (Discounted, >80% LTV) currently 4.3% for this loan.

Purchase February 2011

* House Price – €405,000
* Mortgage at 92% – €372,600
* Max term (against ages) – 30 years
* Mortgage Interest Rate – 4.3% Variable with Ulster Bank
* Mortgage Repayment €1,843.49 pm (gross)

Therefore although in this example the value of the property has fallen by 30%, if my clients do not intend to sell/move there is no real negative equity under current market conditions.

Obviously we would all prefer to be in the situation whereby we have less debt a la the people purchasing now. However, what the above really highlights is the value of the tracker mortgage and the necessity at all times to remind customers/friends of this.

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Following on from Wednesday’s announcement by KBC Homeloans that they are increasing their fixed rates and today’s announcement by Irish Nationwide that they will no longer be accepting new business applications a lot has changed with regard to the best mortgage rates available in the Irish residential housing market.

I have delved through each banks rates to ascertain the best rates dependant on the loan to value of the property i.e. mortgage amount divided by current value of the property.

Below are the three tables I have come up with, but prior to reviewing them please note the following:

• Each bank will have its own criteria for assessing a loan application
• First time buyers generally get the better rates
• AIB are not interested in taking over another institutions debt unless the client has an existing (strong) relationship with AIB
• Most of the offers relate to new business – rates for existing customers will generally differ (be more expensive)
• KBC Homeloans will refinance loans up to 80% and include debts of up to €40k provided they are not credit cards
• KBC Homeloans will also pay €1,000 towards the legal fees for switching
• The cost per thousand figure relates to your monthly repayment i.e. multiply the amount of thousands you owe by the term amount – for example €200,000 with an LTV of 75% over 25 years on the 2 year fixed rate is: 200 x €4.95 = €990pm
• Please note that the figure generated using the “cost per thousand” matrix is a gross figure and does not take account of any mortgage interest relief you may be entitled to

Obviously these are indicative figures should you to discuss your own situation and the options available for yourself please don’t hesitate to contact us by email or phone 1890 255346.

*First Time Buyer
**New & Existing Business
 

*First Time Buyer
**New & Existing Business

*First Time Buyer
**New & Existing Business
***New Business Only

For more information please contact us here or phone 1890 255346.

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A case study: Married couple cut their Monthly Mortgage Protection bill in half

A married couple came to me before Christmas. They, like many Irish people had in addition to their family house, a second home which they were renting out. They had taken mortgage protection out on both with a leading Irish provider. At the time when they took out their policies, both were smokers, not heavy smokers but smokers nonetheless. And one of them was a type 1 diabetic. Because of this, their policy was loaded massively and was coming in at over €500 per month! Perhaps a monthly mortgage for some people…

When they came to me (4 years after they took out their policy), both were non-smokers for over 2 years and the applicant with type 1 diabetes maintained excellent control. After assessing their situation and reviewing alternative policies to the one they had it became clear they could make a huge saving. Ultimately they went with a provider who was price was under €300 per month saving the couple over €200 per month.  Or to put another way a saving of around €75,000 euro over the term of their mortgage protection.  To repeat, again A SAVING OF SEVENTY FIVE THOUSAND EUROS

I strongly advocate that every year you take time out of your busy life to review the financial products you have such as (1) Your Mortgage (2) Your Pension (3) Private Health (4) Income Protection (5) House Insurance etc.

The market is competitive. Companies want your business. So when VHI raise their premiums, or a specific bank raises their interest rates, don’t sit back and take it. Be aware of what the alternatives are. And if you don’t have the time to do this yourself, contact All Financials, or your existing Financial Advisors and request an annual review.

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1) LTV – Loan to value

Quite simply this is the amount as a percentage the bank is willing to lend. For example both BOI and AIB offer 92% loans to first time buyers; therefore the client has to come up with the balance of 8% + costs. Other institutions like PTSB, Irish Nationwide and KBC will offer up to 90% to first time buyers.

2) Deposit or Balance

Banks like the majority of this to be saved as it helps towards repayment capacity (explained below), however some will still accept a gift from a parent. Those banks that do accept the gift will in most cases ask to see the bank statement from which the gift will be paid i.e. the parents deposit account.

3)      Repayment Capacity

This is the key criteria for all institutions. Be it through savings, rent payments and other loan repayments (that will be cleared prior to the mortgage drawdown) a client must be able to demonstrate repayment above and beyond the mortgage repayment. For example if a client saves €300 per month and is also paying rent of €850 per month, they are showing a repayment capacity of €1,150 per month. The bank will then stress this against the variable rate + 2% (approx.) which would allow the client a mortgage of circa €200k over 35 years.

4) Employment

Over the last few years this has become a major issue. Banks are looking for clients who are in a stable and permanent position. Therefore, a client must be at least 6 months in a job (1 year for some banks) and be finished their probation period. For self-employed applicants most banks will require the applicant to be 2 years self-employed and will look for a P21 (tax return) to verify earnings. There are some occupations whereby banks may refuse a mortgage.

5) Savings

As mentioned above clients should show savings for at least the last 6 months (as banks will require 6 months bank statements) as these will show both financial prudence and repayment capacity.

6) Rent

We discussed how rent shows repayment capacity however it is important that there is evidence of rent being paid in the applicant’s bank statements. Therefore clients should avoid paying rent in cash. Even if the applicant is living at home and is paying their parents a nominal amount they should set-up a standing to their parents bank account.

7) Mortgage rates

As First Time Buyers are the banks favourite mortgage customer they can expect to get better rates than are on offer to other mortgage applicants. At present the best variable mortgage ratesin the market are circa 3.1% (apr 3.14%) and the best 3 year fixed rate is 3.45% (apr 3.7%).

Above is a synopsis of some of the issues and current market conditions facing First Time Buyers. If you would like to discuss any of the above or if you would like to find out some more about buying a house, please don’t hesitate to contact us on LoCall 1890 255346 or visit the main All Financials Website for more information

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As part of the National Recovery Plan the government are reducing the amount of tax relief for pension contributions to 20% by 2014.

Those affected are:

 1)    Employees who, in addition to their company, contribute to the Pension scheme, including AVCs (additional voluntary contributions)

2)    Self-employed (Sole-Traders or Partners) who contribute to a Personal Pension or a PRSA

 Current tax relief on Pensions

Currently any of the above will receive tax relief on their pension contributions at the marginal rate (41% if you are paying at this rate) and also avail of relief against PRSI and Health Levy’s.

This means quite simply that if you are an employee contributing €100 to your company pension plan per month you avail of the 41% (if you are in this bracket) +  4% (PRSI) + 3% (Average Health Levy, depending on earnings) + 2% (Average Income Levy, depending on earnings) = 50% (average).

 Therefore the net effect of this contribution is that for every €100 you contribute it is only costing you €50.

 Future tax relief on Pensions

 Under the pension break changes recently announced, this will reduce to a total relief of 20% in 2014. Therefore for every €100 you contribute to your pension it is costing €80.

 When will these changes take place?

 2011

• Removal of PRSI and Health Relief Levy
• Earnings cap reduced to €115,000 (please refer to notes below)
• Standard Fund Threshold reduced (please refer to notes below)
• Tax free lump sums in excess of €200k to be taxed

 2012

• Income tax relief reduced to 34%

 2013

• Income tax relief reduced to 27%

 2014

• Income tax relief reduced to 20%

Under the above you will continue to get all the mentioned relief’s up until December 31^st 2010 and from their on they will decrease.

 NOTES:

1) The reduction to €115k of the earnings relates to level of income for which you can contribute and avail of tax relief. The level of contributions you can make in relation to this cap is determined by your age.

2) The Standard fund threshold currently stands at €5.4m, this is to be reduced next year but the government has not indicated by how much

3) Tax free lump sum reduced to a maximum of €200k is the portion of your pension you can take without any tax liability. This is 25% of the pension plan and therefore your pension fund would have to be over €800k for this to affect you.

CONCLUSION:

Those affected are employees and professionals who cannot incorporate their businesses.

N.B. The above is a synopsis of the pension reforms, as individuals will have different salaries and employment types you should contact your Financial Adviser to ascertain how and when these reforms affect you.

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And really therein lies the question: how many people out there know what their allocation rate (i.e. how much of their pension is actually invested?) is?  Also, what management charges they are paying their pension provider / life Company?

Historical contracts might, for example, run a 95% allocation rate (i.e. 95% of your money gets invested) and 1.2%-1.5% management charges, particularly if the consumer started their pension with their bank.

Newer contracts are a lot more transparent thanks to increased regulation and should offer the client upwards of 98% allocation rates on regular premiums and 100% or more on single premium investments. Management charges can vary depending on the make-up of fund and if it is run by a third party, but a good guideline would be circa 1%.

Unfortunately, PRSAs do not offer allocation rates as high as those available with Executive and in most case Personal pension plans.

Whether you are starting a pension or reviewing your existing pension you should ask these questions. Remember you own the product, it is your retirement savings plan and if you are not happy you can move to another provider.

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This blog will be used primarily to discuss topical events in the financial services industry and we hope will bring new developments and interesting stories to your attention.

Please feel free to leave me a comment or Contact All Financials through our website enquiry form.

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