Looking Back: Part 1

Hello and welcome back to Mortgage Advisor on FIRE. For a while, I’ve been wanting to revisit old posts, tidy them up, and bring them in line with the look and feel of the site now. Rather than just going back and editing the old posts, I thought it might be interesting to look back at them and reflect on what I was thinking at that time. You can find my thoughts on this post at the end of the original blog.

I hope you find this interesting, and thanks for reading.

~ David Scothern, February 2024.

Originally published November 1st, 2019.

F.I.R.E. – Financial Independence, Retire Early: My Four-Year Plan for Financial Independence

This modern life of selling time for money does not work for me.  I know it may be seen as a “millennial” or “first world problem”, but to draw on a recent quote “to suffer unnecessarily is masochistic rather than heroic.”

I’m not work-shy, but I want to be able to do my own work.  I want to create something, be that through writing, a website, a business… I just don’t want to be chained to a desk doing something that I find unfulfilling.  

I plan to post once per week around the weekend with an update on my financial position and progress towards my goal.  I will also discuss other random financial matters along the way.

So, on to my plan for F.I.R.E.

The Goal

Financial Independence by 31/12/2023.

Financial Independence is having enough passive income to meet all your basic needs, preferably with something left over for luxuries and the enjoyment of life.  It is a state where you no longer have to work for money, although you may choose to do so.  It’s being in a position where you can say “no” to anything you don’t want to do.  It’s not so much about the money; the money is the tool that carves your freedom.  It’s a means to an end.

What do I need for Financial Independence?

To cover the absolute basics, I need to account for the following:

Mortgage, Ground Rent & Service Charge – £300 per month.

Utilities – £100 per month.

Council Tax – £60 per month.

Food – £300 per month.

General Spending Money – £200 per month.

Rounded up, I’m looking at £1,000 per month.  My somewhat ambitious target assumes that I will want to have a standard of living comparable to what I have now.  £1,500 per month, although less than what I take home from my job, would be enough to ensure a very comfortable standard of living.  It will be an even better standard of living if my plan comes to full fruition and I move to a country where the cost of living is lower.

Current Financial State

Premium Bonds – £8,250

Stocks and Shares ISA – £6,519

Cash Savings – £1,650

I did have more, but I’ve just used £14,000 to pay off a loan, meaning my only debt is now a mortgage of £135,236.68 and a credit card with £3,995.65 outstanding.

Each month I contribute £250 in to my Stocks and Shares ISA, and invest a further £400 in Premium Bonds.  I also add £100 into what I call my Fuck It fund.  This is a pot of money that I’m accumulating to cover basic expenses in the event of an emergency.  The target amount is £4,500, or three months of comfortable living at £1,500 per month.  By the time I’m financially independent, this will be a nice safety net to have.

My credit card balance is unusual.  It’s not normally this high but I’ve recently booked several flights using the card and made a large purchase for a family member based outside the UK.  I’ll be getting some of that money back in December though.  When I get that money back (approx. £1,800) I have to decide whether to pay that off the card or invest it.  I’ll explain later why I have this choice.

My financial state at the moment is healthy, even with the credit card.  I have plenty of surplus income and I have a decent amount of cash behind me to cover emergencies.  However, the key to F.I.R.E. is not capital, but passive income.  I need to generate passive income and I need to do it quickly.  The key to passive income is property.  

This is going to be a joint venture and we are looking at properties in the £80,000-£90,000 bracket.  The great thing about property is that you can buy it using other people’s money.  So, instead of getting a return on just your cash, you can leverage another person’s or business’s cash.  Mortgage lenders are generally quite happy to lend against property as they know they will have a constant flow of interest being paid back. If the borrower defaults they can repossess the property.  When buying a property to let out, it has to be on an interest-only basis.  The model does not work otherwise.  

Interest-only mortgages are based on the premise that the bank lends you money for a set period of time.  You pay interest each month but nothing towards the debt.  At the end of the loan term, you pay the debt back in a lump sum.  For many people this is a risky strategy, especially when they have an interest only loan on their main residence.  For a BTL mortgage though, it is absolutely essential.  Most BTL mortgages are set up with a loan-to-value of less than 75%.  This means that the loan is for less than 75% of what the property is worth, so on a £100,000 property the mortgage would be for less than £75,000.  This is to provide the bank with a buffer in the event of repossession.  The other £25,000 comes from the borrower.  The borrower is then charged interest on the £75,000 but the borrower gets to earn a return on the whole value of the property i.e. £100,000.  

The real genius part of this model comes from inflation and compounding.   Over the last thirty years, the average house price in the UK has risen from approx. £60,000 to over £200,000.  An average increase of just over 4% a year.  A £100,000 property now, based on long-term historical trends, could be worth over £200,000 in twenty years.  The interest-only balance does not increase with inflation though.  So, in twenty years you will owe £75,000 against an asset worth £200,000 and not £100,000.  The real value of the £75,000 will be lower as well due to inflation.  £75,000 in 1999 has the same spending power as £120,000 now due to inflation.  Using compounding and inflation, one can systematically create wealth.

The Cost of the BTL 

1. Deposit of up to £22,500. 
2. Legal and valuation fees of approx. £1,500.
3. Stamp Duty Land Tax charged at 3% of purchase price on a BTL.  So, potential to be up to £2,700.
4. Basic refurb costs of £3,000.

Total one-off costs of £29,700, of which I would be paying 50%; so £14,850.

I’m using my Premium Bonds as the deposit.  With interest rates as low as they are in savings accounts, I see no point in tying up large amounts of cash in bank accounts.  With Premium Bonds there is no interest but there is the chance of earning money through the monthly prize draw.  Since November 2018, I’ve won £325 through Premium Bonds with is decent return and almost certainly better than what I would have through a bank account.  

We are aiming to have our first BTL by the middle of 2020.  I have from November through to May to raise £6,600; the difference between what I have in Premium Bonds now and what I will need for my half of the BTL.  In December I will be receiving the £1,800 I referred to earlier in this post.  I could use it to pay down my credit card, but that balance will be coming down anyway.  I think I will end up using that money to boost my deposit fund for the BTL.  Instead of needing £6,600 by May, I would only need £4,800.  I’m also expecting a further £800 to drop in to my bank in the next couple of days.  If I throw this into the Premium Bonds then I only need £4,000 by May.

The alternative is to hammer the payments on the credit card so I reduce the balance to zero and then use a cash advance to make up the shortfall in any deposit funds I need.  This is something I need to think about and there is no major rush, as I can always hold on to the cash whilst I decide.  Another alternative is to transfer the credit card to a zero percent card and then just set up a regular payment to it to reduce the balance that way, but I’m not too keen on this idea.  I have an air miles credit card and a lot of my spending goes on that card to generate the air miles.  Another option I have considered is to round up my payments off the card.  For example; if I spend £8.37 on lunch on the card, then I pay £10 off it immediately.  This, in conjunction with regular payments, should bring the debt down over time as well.  

Coming back to the BTL.  Once we have the property and an agent managing the property with a tenant in place, we can realistically expect to net £300 per month.  We have agreed to keep a percentage of our monthly income to one side to cover expenses such as void periods, damage to the property or difficult tenants.  From the first property, I can expect to see £100 per month.  Not a huge amount, but it’s a start.  As we scale up we will see a better rate of return and I will explain how in the next installment of this blog.

My Thoughts Looking Back

Oh, I was so optimistic about being able to retire by the end of 2023. This plan was put together before Covid struck, and before the war in Ukraine. It was before the cost of living crisis, the clusterfuck of the brief Truss government, and all the incompetence that is a hallmark of the Tory government under Boris Johnson. Had interest rates not gone crazy and the world not experienced a global pandemic, then things could have turned out very differently.

The biggest change over the last four-and-a-bit years is my attitude towards property investment. Back in 2019, with mortgage rates very low, it was possible to make money with BTL properties, but it’s much more difficult now.

It’s also striking how much my writing has developed through writing this blog each week. The original version of this post had quite a few simple errors, and redundant words, and didn’t read as well as I would like. I’ve made a few tweaks to the post here, but I’ve tried to keep the core of what I was saying at the time.