Reducing the Pain of Equity Release

Some 15 years or so ago my parents took out an equity release mortgage with Northern Rock. They inherited a large house when first married which they have lived in since and which they have always been adamant they never want to leave, but it's a very old building, difficult to heat and, at the time they took out the mortgage, needed a new roof and various other repairs. They borrowed a significant lump sum at an interest rate of 7.25%.

I have just seen the paperwork for the first time and was shocked to realise that the debt is going up at current rate of £11,000 per year. However, the debt doesn't have to be repaid until the house is sold and the theory is that house prices should rise at a rate that will compensate for the interest. It's difficult to be sure that this has been the case as the house is a bit of a "one-off" and difficult to value but I have used the Lloyds house price calculator  and it seems that they currently owe about 30% of the estimated value of the house.

I have been doing some reading around the subject as my parents have asked me to take a look at their more general financial situation and I have discovered that Northern Rock collapsed and the mortgage has been passed to Papilio UK who don't offer any new loans of this kind and don't even seem to be members of the Equity Release Council which is slightly worrying. My plan is to transfer the mortgage to another provider offering a lower interest rate (we could get 5.63% with Aviva) and hopefully release a little more equity which could be used to clear a (recently discovered) credit debt with an interest rate of over 18%.

Given my parents' situation they had few options available back then when the roof needed fixing as the only asset they had was the house. It made sense, and still does, to use that asset to give them the retirement they want, where they want it. I just need to help them do it as painlessly as possible.

Does anyone have experience of this type of mortgage or see any flaws in my plan?

Paying To Trade

How much is it sensible/reasonable to pay to trade and should being able to do so at a lower price help you decide when?

For the last couple of weeks I have had around £10,000 cash sitting in my ISA account due to a further sale of my CIS UK Growth fund. I've been reluctant to buy anything with it as doing so would cost me £10 per trade. Because Interactive Investor owe me £30 commission credit as part of my transfer deal which should arrive any day now I've been hanging on and waiting for this before doing any buying or selling. (II have obviously over stretched themselves due to their low costs and are definitely struggling to keep up with some of the admin on accounts. Things seem to get sorted in the end but you do have to be prepared to wait. I'm hoping this will improve - transferring our ISAs to them has saved us a lot of money so I'm not regretting it just yet.)

When I was a very new investor and keen to see how online trading worked I made the "mistake" of racking up trading costs on very small buys - a couple of times I think I paid £10 to buy £150 worth of funds which is complete madness. These days my regular trades with II are done on a monthly basis and cost £1.50 each, which I have usually managed to squeeze out of the remaining transfer commission credit or the £20 per quarter which II give all their customers. In effect I've been dealing for free for the last 6 months or so. This won't continue for much longer as this will be my last instalment of transfer commission so I will need to squeeze both mine and my husband's regular buys out of the £20 per quarter (we have linked accounts so only pay one set of fees and get one lot of credit). This gives us around two buys a month each, if we want to sell this will cost the full £10.

I'm therefore trying to make sure that all the selling we need to do in order to rebalance both accounts is done over the next few months. This all makes sense from a superficial viewpoint, but I'm not so sure I should be worrying so much about the costs when other factors may carry far more weight. For example, maybe I should have spent £10 and bought £3,000 worth of the iShares UK Div Plus ETF I've got on my shopping list last week when it dipped, rather than hang on and wait till I can buy using the commisson credit. Buying slightly cheaper might have more than compensated for the trading fee.

This seems to be another of those financial "mind set" tricks that can trip us up due to a natural reluctance to speculate, or "waste" what we have in pursuit of greater returns, along with the mantra that tells us it is foolish to pay over the odds to trade. Sometimes it plainly is "worth it".

Strangely I don't worry about this kind of thing when managing my SIPP with Fidelity as I don't really have a choice about when I buy over there. Buys can only be of the bigish kind (you need at least £800 for a lump sum), or made via monthly contributions, and, as I'm not needing to sell anything I don't have lots of unallocated funds lying around. It is all "free" (well, sort of, it's covered by the 0.35% platform fee whereas II is a flat rate £20 per quarter) but it isn't as easy, or immediate, as it is with II. To be honest I prefer the feeling of being "closer" to my investments that I get with II even if it does mean I have to worry about working out and holding myself to a sensible trading strategy.

And speaking of strategies, what % of a buy (or sell) is it sensible to pay in trading costs? Has anyone worked this out? What effect do the costs on your platform have on your trading activities and frequency? Any thoughts very welcome.

Buying Clean (Part 2)

There has been a lot of discussion about "buying clean" in the investing world recently, and it's not been about solar power and wind farms.

If I understand it correctly the whole charging system has been given an overhaul in order to ensure that customers can be totally clear about what they are paying, and what for. Previously fund managers, brokers and fund supermarkets were allowed to "bundle" charges which meant the various components of the fee could not be pulled apart and seen individually (better explanation here). 

In practice this has meant that, during the transition phase, many funds now have more than one "class", one clean and one. The dirty ones are gradually being phased out. 

In practice this has only affected me in a minor way as iii will deal with transferring over my funds into the clean class for me where necessary (thank goodness) but it has meant that I have had to delete two of my regular investments (Fundsmith Equity and BlackRock CIF Emerging Markets tracker) and add them in again as the "clean" version.

The process may only have caused a minor headache as far as managing my investments goes, but it has made me realise that although I do take notice of charges (I chose my trackers partly they are very low cost and I know that this is why passive funds often end up beating actively managed funds in the long term), I have never actually documented the charges I pay. 

So, this seems a good place (and time) to do so:

Baille Gifford Shin Nippon - Investment Trust, Dealing Charges Only

iShares S&P Global Clean Energy - Exchange Traded Fund, Dealing Charges Only

Herald Investment - Investment Trust, Dealing Charges Only

BlackRock CIF Emerging Markets Tracker (D) - 0.20%

FundSmith Equity - 0.9% (0.15% rebate) - 0.75%

HSBC European Index - 0.25% (0.10% rebate) - 0.15%

HSBC FTSE 250 Tracker - 0.25% (0.10% rebate) - 0.15%

Charges Before the Transfer

The charges we have been paying on our CIS Funds (paid directly to the fund manager) are:

CIS Sustainable Diversified 1.55%
CIS UK Growth 1.50%
CIS UK Income with Growth 1.54%
CIS US Growth 1.56%

(I don't even want to think about the 5% initial charges we paid on all these )

Once they are transferred to ii they will be discounted to:

CIS Sustainable Diversified 0.70%
CIS UK Growth 0.70%
CIS UK Income with Growth 0.70%
CIS US Growth 0.70%

This amounts to a saving of around 0.85% on the CIS funds.

In addition ii charges £20 per quarter platform fee, which includes 2 free trades per quarter. As part of my transfer offer (which hasn't completed yet) I will also get £20 cash and £120 dealing credit. Transferring my husbands ISA over into ii as well means that the two accounts can be linked and we only pay one set of fees. All-in-all a very good deal. £80 a year for two ISAs. As we have £54,000 between us this amounts to somewhere around 0.15% to add into the charges above. Which means that overall, when all charges are taken into account, we will be saving 0.70% by moving to iii.

At our current level of investment this comes to around £380 pa. 
(even without taking the transfer offer into account)

Having just sat down and worked this all out properly for the first time I'm pretty amazed at how much difference the combination of being careful to pick low cost funds and finding the right platform can make.
Being aware of charges and making positive steps to reduce them is key. Clean charging plays an important part in helping us do just that.