Hello and welcome back to Mortgage Advisor on FIRE. This week I talk about percentages; the 100% mortgage, increasing savings rates, compound growth, and more.
Weekly Update
It’s been my week of working until 8pm which always leaves me exhausted, but it means I get a three day weekend. On Friday I had a few medical appointments, the last of which was a series of blood tests. I don’t mind having blood taken but the person taking my blood really struggled to find a vein. The needle kept going into my arms and was wiggled around trying to get the blood to come. I left the hospital with cotton wool and tape over a few puncture wounds and now I’ve got a few bruises. I think the person taking the blood found it worse than me. I just thought it was funny but they seemed to be getting stressed. Thinking about it, it must be stressful trying to do something like this and it just won’t work.
The less said about Friday evening the better. Sheffield Wednesday played the first leg of their play-off semi-final and fell to a 4-0 defeat. The whole club is a mess and we need new ownership. There’s not a single area of the club that has improved since our current owner took over. But yeah, the less said about it the better.
On Saturday I went for a drink and some bao buns with my Dad. It was his first time trying bao buns and it’s fair to say he enjoyed them. In the evening Oana and I had a friend over for some Mexican food. We always have a good laugh with this guy. Oana and I met him through our mutual employment and have been friends for over a decade now. Whenever we meet up the time just zooms by. Below is a pic of the food we made; some chicken, onions, and peppers in a Mexican seasoning, with some rice, pickled red onion, jalapeños, creme fraiche, and guacamole.
The Boring Middle
This, and similar phrases, are ones I’ve noticed a lot more often in recent months. FIRE has become increasingly popular in the last decade or so, and it shouldn’t be surprising that a lot of FIRE followers are finding themselves in this Boring Middle phase.
When you first start following a FIRE plan the milestones come thick and fast. When you save £500 one month, then another £500 the following month, your pot has doubled. However, a couple of years down the road that £500 monthly investment looks like a drop in the ocean. It feels like diminishing returns but it’s absolutely vital to remember that each investment into the pot makes a difference. Think about it like this, if a building requires one million bricks, the first brick and the final brick are both equally important if you want the finished structure.
So, for now, it’s just about following the process and letting each investment grow and compound over time.
As I was thinking about this idea of the Boring Middle, a friend sent me an article about how increasing your savings rate can bring forward retirement. The article talking about percentage increases in a way that I could understand, and in a way that most reasonably knowledgeable investors can understand. However, I felt the content suffered from a lack of clarity for complete newbies. This ultimately boils down to how percentages work. Let me tell you a story about a store I used to work at. This store had a discount card scheme where you paid a couple of pounds for membership. This then granted you a minimum 10% discount from the normal price. Every so often they would run a “double discount” promotion where you got your normal 10% discount, and then a further 10% discount. Almost every single customer assumed this meant a total discount of 20%. However, that’s not how percentages work. Take this example…
You have a fleece on sale at £100. With the normal 10% discount the price is reduced to £90. If you take a further 10% off, the price is now £81. So, the total saving is actually 19%.
Let’s look at another example, but this time a stock that is priced at 50p. If that stock increases in value by 10%, and then drops by 10%, it doesn’t end up back at 50p. Instead, the value goes from 50p to 55p, and then drops to 49.5p.
Anyway, this article talked about increasing your savings rate by 1% and the impact that would have on your FIRE target date. However, this 1% increase was not referring to increasing your savings from, say, £100 per month to £101 per month. It was referring to the percentage of your salary that you invest, and then bumping the rate up by 1%. So, if you invest 10% of your salary each month, you’d increase it to 11%. If you save 20% of your salary, you’d instead do 21%.
People have to be very careful when talking about percentage increases. I remember one book that started with a cautionary tale of a student describing the increase in knife crime in their city. I can’t remember the exact details, but it was something like, “knife crime has increased every year, by 50%, since XYZ date.” What they had meant was the figure had increased from the first date to the last date by 50%, and that it was a steady increase year on year. How is this different?
Year 1: 100 crimes. If this increases by 50% by Year 10, then you’d have 150 crimes at the end. If the number of crimes increased by 50% each year, then you’d have almost 6,000 crimes in Year 10. The wording matters. It’s also a great example of how compound growth works, but I digress.
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2023 Goals
Click here to see my 2023 progress (opens a new tab).
What Am I Doing?
TV: Masterchef (BBC). The Power (Amazon).
Audiobook: Apples Never Fall by Liane Moriarty.
We’ve still been enjoying Masterchef on the BBC. This week saw the last of the heats, and this coming week is “knockout week” where the competition starts to get serious. A few years ago Oana and I both read The Power by Naomi Alderman, in which women around the world develop the power to emit electricity from their bodies. This drastically changes the nature of human society. The book was generally good, and I remember it kept me turning the page. It was absolutely no surprise it was made into a TV show. The show is ok. It suffered from a few instances of X-Pac Heat, in which characters were annoying but not in a way you love to hate, but in a way that you mentally switch off.
Financial Update
Assets
Premium Bonds: £7,500.00 (+£150.00).
Stocks and Shares ISA: £83,945.46 (-£372.67).
Fuck It Fund: £400.00 (no change).
Pensions: £57,893.67 (+£246.64).
Residential Property Value: £226,085.00 (no change).
BTL Property Value: £145,893.00 (no change).
Total Assets: £521,717.13 (+£23.97).
Debts
Credit Card: £0.00 (no change).
Loans: £9,500.00 (-£100.00).
Residential Mortgage: £177,728.81 (no change).
BTL Mortgage: £104,992.26 (no change).
Total Debts: £292,221.07 (-£100.00).
Total Wealth: £229,496.06 (+£123.97).
Investment Income in 2023: £1,555.75 (target £8,500).
Another week with only minor changes to my finances. I get paid next week but only a small amount of my salary will be able to go to investments, as we have some other expense we need to account for. Both Oana and I need some new clothes. We don’t go shopping for clothes that often, and generally prefer to shop online, but this time we actually need to go and try things on. Neither of us are looking forward to it but it’s necessary for some events we have coming up. It’s also going to cost a fair bit, but that can’t be avoided in this instance.
By next week’s post I should have received more income which should push my 2023 year-to-date figure to approximately £1,900. The week after should see that figure almost double. My investment income is the only major positive I can take from my FIRE plan at the moment. The market feels stagnant and the days are dragging. I was exchanging messages with a friend to this effect, in that we measure financial plans on the scale of years and decades, but we live our lives in days and weeks. So, in the short term it can really feel like a slog when nothing seems to be moving in the right direction.
Track Record Mortgage – Skipton
This week saw Skipton Building Society launch a new product called a Track Record Mortgage. This is a mortgage that requires no deposit and is based on the applicant’s history of paying rent. It’s an interesting approach to lending, but I think it’s going to end up a niche product with not a huge amount of take up.
On Skipton’s website there is a calculator that works out how much you may be able to borrow based on the rent you’ve been paying. I had a play about with the figures and it just doesn’t seem to add up. For example, my BTL property is valued at £145,893. I last advertised it for rent at £725 and had a lot of interest, with a tenant recently moving in. However, according to Skipton’s calculator a track record of paying £725 in rent will allow the renter to borrow £135,170 over a term of 35 years (the maximum they allow). Using my own apartment as another example, these are being listed for let at £1,100-£1,200 per month. Skipton’s calculator suggests the renter could borrow £223,730, which is slightly lower than the current index value for my apartment (£226,085) and much lower than what some of them are selling for (£230,000+).
I think the concept of a track record mortgage is a great idea, but I think it needs refining. So, what would my proposal for a similar mortgage product be?
David’s Rent-to-Buy Mortgage
My idea is similar in some respects but with several fundamental differences. It’s easier to explain with an example. Let’s use a fictional couple, John and Jane.
John and Jane want to buy a property but have no deposit. They see a house for sale that they’d love to live in. It’s on the market at £150,000. They see a zero-deposit mortgage being offered by my fictional lender. The proposed mortgage looks like this… The applicants choose what “deposit” they would want to select; 10%, 20%, or 30%. They then choose the term over which they want to save the deposit. So, let’s assume they go for 20% over 5 years. That means they need to save £30,000 over 60 months; a total of £500 per month. But how does this actually work with the lender?
In this type of mortgage the lender would buy the property on behalf of the applicants, who would be locked in to this mortgage from day one with early repayment charges that last for the duration of the “deposit saving” period; in this case five years. During this period, the applicants also pay rent to the lender at a rate of say 2% of the market value at the time of application (2% of £150,000, divided by 12 = £250). In total, each month, John and Jane pay £750 to the lender; £500 for the “deposit” and £250 for “rent”.
John and Jane could end this agreement at any time during the deposit saving period but forfeit part of the deposit saved so far (the early repayment charges mentioned earlier) and the lender would then be able to sell the property on the open market. If, at the end of the deposit saving period, John and Jane proceed with the purchase, then the new mortgage starts, and proceeds, just like any other mortgage.
Disclaimer
The views and opinions in this blog are my own, and do not represent the views or opinions of my employer, nor should they be considered advice.
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Good luck to Wednesday in the final!
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